RBC CAPITAL MARKETS RAYMOND JAMES

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1 NEW ISSUE - Book-Entry-Only OFFICIAL STATEMENT DATED JANUARY 28, 2015 Ratings: Moody s: Aa2 S&P: AA See OTHER INFORMATION - RATINGS In the opinion of Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes and the Obligations are not private activity bonds under existing law. See TAX MATTERS - TAX EXEMPTION for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. THE OBLIGATIONS HAVE NOT BEEN DESIGNATED AS QUALIFIED TAX EXEMPT OBLIGATIONS FOR FINANCIAL INSTITUTIONS. $73,310,000 GENERAL OBLIGATION REFUNDING BONDS SERIES 2015 Dated Date: February 1, 2015 Interest Accrual Date: Date of Delivery CITY OF WACO, TEXAS (McLennan County) $13,235,000 COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2015 Due: February 1, as shown on inside cover The $73,310,000 City of Waco, Texas, General Obligation Refunding Bonds, Series 2015 (the Bonds ), and the $13,235,000 City of Waco, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2015 (the Certificates and, together with the Bonds, the Obligations ), are being issued by the City of Waco, Texas (the City ), pursuant to the terms of two separate ordinances adopted by the City Council of the City. Interest on the Obligations will accrue from the date of delivery, and will be payable February 1 and August 1 of each year commencing August 1, 2015 for the Bonds and February 1, 2016 for the Certificates, and will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( DTC ) pursuant to the Book- Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see THE OBLIGATIONS BOOK-ENTRY-ONLY SYSTEM ). The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A. (see THE OBLIGATIONS PAYING AGENT/REGISTRAR ). AUTHORITY FOR ISSUANCE...The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas (the State ), including particularly Chapter 1207, Texas Government Code, as amended, and an ordinance (the Bond Parameters Ordinance ) adopted by the City Council of the City in which the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Bonds through the execution of a Pricing Certificate (the Bond Parameters Ordinance and the Pricing Certificate together are referred to herein as the Bond Ordinance ). The Bonds are direct obligations of the City payable from the levy and collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City as provided in the Bond Ordinance. See THE OBLIGATIONS SECURITY AND SOURCE OF PAYMENT OF THE BONDS. The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, Chapter 1371, Texas Government Code, as amended, and an ordinance (the Certificate Parameters Ordinance ) adopted by the City Council of the City in which the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Certificates through the execution of a Pricing Certificate (the Certificate Parameters Ordinance and the Pricing Certificate together are referred to herein as the Certificate Ordinance ). The Bond Ordinance and the Certificate Ordinance are referred to together herein as the Ordinances. The Certificates are direct obligations of the City payable from the levy and collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City as provided in the Certificate Ordinance, and from a limited pledge, not to exceed $1,000, of the surplus revenues of the City s water and sewer systems. See THE OBLIGATIONS SECURITY AND SOURCE OF PAYMENT OF THE CERTIFICATES. PURPOSE OF THE BONDS...ProceedsfromthesaleoftheBonds will be used to refund a portion of the City s outstanding ad valorem tax debt obligations described on SCHEDULE I Schedule of Refunded Obligations (the Refunded Obligations ) in order to lower the overall annual debt service requirements of the City, and to pay the costs associated with the issuance of the Bonds. See PLAN OF FINANCING PURPOSES OF THE BONDS and -USE OF PROCEEDS FROM THE BONDS. PURPOSE OF THE CERTIFICATES...ProceedsfromthesaleoftheCertificateswillbeusedtopayforthecostof(1)expansionandimprovementstoexistingCity administration and services buildings; (2) construction and acquisition of, and improvements to, City streets, traffic control systems, sidewalks, street lighting and drainage, including in each case the acquisition of land and rights-of-way in connection therewith; (3) the acquisition of vehicles, fire-fighting equipment, radio equipment and other equipment for authorized City purposes; (4) improvements to City sanitary sewer facilities, including in each case the acquisitionoflandand rights-of-way in connection therewith; (5) improvements to the City s waterworks system, including in each case the acquisition of land and rights-of-way in connection therewith; and (6) professional services incurred in connection with items (1) through (5), and to pay the costs incurred in connection with the issuance of the Certificates (see PLAN OF FINANCING PURPOSE OF THE CERTIFICATES and USE OF PROCEEDS FROM THE CERTIFICATES ). OPTIONAL REDEMPTION...The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS OPTIONAL REDEMPTION ). Maturity Schedule on Inside Cover Page LEGALITY...TheObligationsareofferedfordeliverywhen,asandifissuedandaccepted by the underwriters identified below (the Underwriters ) subject to the approving opinion of the Attorney General of Texas, the opinion of Bracewell & Giuliani LLP, Austin, Texas (see APPENDIX C FORM OF BOND COUNSEL S OPINION ), and the opinion of Andrews Kurth LLP, Austin, Texas, as Underwriter s Counsel. DELIVERY...ItisexpectedthattheObligationswillbeavailablefordeliverythrough DTC on February 24, CITIGROUP RBC CAPITAL MARKETS RAYMOND JAMES

2 MATURITY SCHEDULES THE BONDS Initial Due Interest Reoffering CUSIP Due February 1 Principal Rate Yield Number (1) February 1 Principal Initial Interest Reoffering CUSIP Rate Yield Number (1) 2016 $ 840, % % GK (2)(3) $ 5,425, % % GW , GL (2)(3) 995, GX , GM (2) 1,035, GY , GN (2) 1,075, GZ ,190, GP (2)(3) 1,120, HA ,535, GQ (2)(3) 4,465, HB ,810, GR (2)(3) 1,190, HC ,170, GS (2)(3) 1,240, HD ,550, GT (2)(3) 1,295, HE (2)(3) 7,950, GU (2)(3) 1,340, HF (2)(3) 8,375, GV1 (Interest accrues from Date of Delivery) THE CERTIFICATES Initial Due Interest Reoffering CUSIP Due February 1 Principal Rate Yield Number (1) February 1 Principal Initial Interest Reoffering CUSIP Rate Yield Number (1) 2016 $ 345, % % HG (2)(3) $ 650, % % HS , HH (2)(3) 675, HT , HJ (2)(3) 705, HU , HK (2)(3) 735, HV , HL (2)(3) 765, HW , HM (2) 790, HX , HN (2) 815, HY , HP (2) 835, HZ , HQ (2) 860, JA (2)(3) 625, HR (2) 895, JB2 (Interest accrues from Date of Delivery) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP services. None of the City, the Financial Advisor, or the Underwriters shall be responsible for the selection or correctness of the CUSIP Numbers set forth herein. (2) The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS OPTIONAL REDEMPTION ). (3) Priced to par call on February 1, 2024 SEPARATE ISSUES...The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Bonds and the Certificates share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. 2

3 This Official Statement, which includes the cover page, the Schedule and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor or the Underwriters. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described. NONE OF THE CITY, THE FINANCIAL ADVISOR OR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY-ONLY SYSTEM. No registration statement relating to the Obligations has been filed with the United States Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon an exemption provided thereunder. The Obligations have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been registered or qualified under the securities laws of any other jurisdiction. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. The statements contained in this Official Statement that are not purely historical are forward-looking statements, including statements regarding the City s expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. See OTHER INFORMATION FORWARD-LOOKING STATEMENTS. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in acceptance with, and as a part of their responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. In connection with this offering, the Underwriters may over-allot or effect transactions which stabilize the market price of the issue at a level above that which might otherwise prevail in the open markets. Such stabilizing, if commenced, may be discontinued at any time. 3

4 TABLE OF CONTENTS MATURITY SCHEDULES...2 OFFICIAL STATEMENT SUMMARY...5 SELECTED FINANCIAL INFORMATION...7 GENERAL FUND CONSOLIDATED STATEMENT SUMMARY...7 CITY OFFICIALS, STAFF AND CONSULTANTS...8 ELECTED OFFICIALS...8 SELECTED ADMINISTRATIVE STAFF...8 CONSULTANTS AND ADVISORS...8 INTRODUCTION...9 DESCRIPTION OF THE CITY...9 PLAN OF FINANCING...9 PURPOSE OF THE BONDS...9 PURPOSE OF THE CERTIFICATES...9 REFUNDED OBLIGATIONS...10 USE OF PROCEEDS FROM THE BONDS...10 USE OF PROCEEDS FROM THE CERTIFICATES...10 THE OBLIGATIONS...11 DESCRIPTION OF THE OBLIGATIONS...11 AUTHORITY FOR ISSUANCE OF THE BONDS...11 AUTHORITY FOR ISSUANCE OF THE CERTIFICATES...11 SECURITY AND SOURCE OF PAYMENT OF THE BONDS...11 SECURITY AND SOURCE OF PAYMENT OF THE CERTIFICATES...11 TAX RATE LIMITATION...11 OPTIONAL REDEMPTION...11 NOTICE OF REDEMPTION...12 DEFEASANCE...12 BOOK-ENTRY-ONLY SYSTEM...12 PAYING AGENT/REGISTRAR...14 TRANSFER,EXCHANGE AND REGISTRATION...14 RECORD DATE FOR INTEREST PAYMENT...15 OBLIGATION-HOLDERS REMEDIES...15 AMENDMENTS TO THE ORDINANCES...15 TAX INFORMATION...16 AD VALOREM TAX LAW...16 EFFECTIVE TAX RATE AND ROLLBACK TAX RATE...17 PROPERTY ASSESSMENT AND TAX PAYMENT...18 CITY APPLICATION OF PROPERTY TAX CODE...18 TAX ABATEMENT POLICY...19 TAX INCREMENT REINVESTMENT ZONES...19 TABLE 1-VALUATION,EXEMPTIONS AND GENERAL OBLIGATION DEBT...21 TABLE 2 TAXABLE ASSESSED VALUATION BY CATEGORY...22 TABLE 3-VALUATION AND GENERAL OBLIGATION DEBT HISTORY...23 TABLE 4-TAX RATE,LEVY AND COLLECTION HISTORY...23 TABLE 5-TEN LARGEST TAXPAYERS...23 TABLE 6-TAX ADEQUACY...24 TABLE 7-ESTIMATED OVERLAPPING DEBT...24 DEBT INFORMATION...25 TABLE 8 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS...25 TABLE 9-INTEREST AND SINKING FUND BUDGET PROJECTION...26 TABLE 10 SELF-SUPPORTING DEBT...26 FINANCIAL INFORMATION...29 TABLE 11 GOVERNMENTAL ACTIVITIES:CHANGE IN NET ASSETS...29 TABLE 11A GENERAL FUND REVENUES AND EXPENDITURE HISTORY...30 TABLE 12 ENTERPRISE FUNDS:NET REVENUES AVAILABLE FOR DEBT SERVICE TABLE 13 - MUNICIPAL SALES TAX HISTORY CAPITAL IMPROVEMENT PROGRAM WATERWORKS AND SEWER SYSTEM WATER SYSTEM WASTEWATER TREATMENT MONTHLYWATER RATE MONTHLYWASTEWATER RATE TABLE 14 CONDENSED SUMMARY OF OPERATIONS FINANCIAL POLICIES INVESTMENTS LEGAL INVESTMENTS INVESTMENT POLICIES ADDITIONAL PROVISIONS THE CITY S INVESTMENT POLICY TABLE 15 - CURRENT INVESTMENTS TAX MATTERS TAX EXEMPTION ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS CONTINUING DISCLOSURE OF INFORMATION ANNUAL REPORTS EVENT NOTICES AVAILABILITY OF INFORMATION LIMITATIONS OF AMENDMENTS COMPLIANCE WITH PRIOR UNDERTAKINGS OTHER INFORMATION RATINGS LITIGATION REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS INTEXAS LEGAL MATTERS FINANCIAL ADVISOR VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS UNDERWRITING FORWARD-LOOKING STATEMENTS AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION SCHEDULE I SCHEDULE OF REFUNDED OBLIGATIONS APPENDICES GENERAL INFORMATION REGARDING THE CITY... A EXCERPTS FROM THE CITY OF WACO,TEXAS ANNUAL FINANCIAL REPORT... B FORMS OF BOND COUNSEL'S OPINIONS... C The cover page hereof, this page, the schedule and the appendices included herein and any addenda, supplement or amendment hereto, are part of the official statement. 4

5 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Obligations to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY... THE BONDS... The City of Waco, Texas (the City ) is a political subdivision and municipal corporation of the State of Texas (the State ), located in McLennan County, Texas. The City covers approximately 99 square miles (see INTRODUCTION - DESCRIPTION OF THE CITY ). The Bonds are issued as $73,310,000 City of Waco, Texas, General Obligation Refunding Bonds, Series 2015 (the Bonds ). The Bonds are dated February 1, 2015, and are issued as serial bonds maturing February 1, 2016 through February 1, 2036 (see THE OBLIGATIONS - DESCRIPTION OF THE OBLIGATIONS ). THE CERTIFICATES... The Certificates are issued as $13,235,000 Combination Tax and Revenue Certificates of Obligation, Series The Certificates are dated February 1, 2015, and are issued as serial certificates maturing February 1, 2016 through February 1, 2035 (see THE OBLIGATIONS - DESCRIPTION OF THE OBLIGATIONS ). PAYMENT OF INTEREST... AUTHORITY FOR ISSUANCE OF THE BONDS... AUTHORITY FOR ISSUANCE OF THE CERTIFICATES... SECURITY FOR THE BONDS... SECURITY FOR THE CERTIFICATES... Interest on the Obligations accrues from the date of delivery, and is payable on August 1, 2015 for the Bonds, and each February 1 and August 1 thereafter, and on February 1, 2016 for the Certificates, and each August 1 and February 1 thereafter, until maturity or prior redemption (see THE OBLIGATIONS DESCRIPTION OF THE OBLIGATIONS ). The Bonds are issued pursuant to the constitution and general laws of the State of Texas, particularly Chapters 1207, Texas Government Code, as amended, and an ordinance (the Bond Parameters Ordinance ) passed by the City Council of the City. In the Bond Parameters Ordinance, the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Bonds. The terms of the sale are included in a Pricing Certificate, which complete the sale of the Bonds (the Bond Parameters Ordinance and the Pricing Certificate together are referred to herein as the Bond Ordinance ) (see THE OBLIGATIONS AUTHORITY FOR ISSUANCE OF THE BONDS ). The Certificates are issued pursuant to the Constitution and the general laws of the State, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, Chapter 1371, Texas Government Code, as amended, and an ordinance (the Certificate Parameters Ordinance ) passed by the City Council of the City. In the Certificate Parameters Ordinance, the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Certificates. The terms of the sale are included in a Pricing Certificate, which complete the sale of the Certificates (the Certificate Parameters Ordinance and the Pricing Certificate together are referred to herein as the Certificate Ordinance ) (see THE OBLIGATIONS - AUTHORITY FOR ISSUANCE OF THE CERTIFICATES ). The Bonds constitute direct obligations of the City, payable from the collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City (see THE OBLIGATIONS SECURITY AND SOURCE OF PAYMENT OF THE BONDS and TAX RATE LIMITATION ). The Certificates constitute direct obligations of the City, payable from a combination of (i) the collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $1,000) of surplus revenues of the City's water and sewer system, as provided in the Certificate Ordinance (see THE OBLIGATIONS - SECURITY AND SOURCE OF PAYMENT OF THE CERTIFICATES and -TAX RATE LIMITATION ). REDEMPTION... The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS - OPTIONAL REDEMPTION). TAX EXEMPTION... In the opinion of Bond Counsel, under existing law, the interest on the Obligations is excludable from gross income for federal income tax purposes and the Obligations are not private activity bonds. See TAX MATTERS - TAX EXEMPTION for a discussion of the opinion of Bond Counsel. 5

6 PURPOSE OF THE BONDS.... Proceeds from the sale of the Bonds will be used to refund a portion of the City s outstanding ad valorem tax debt as described on SCHEDULE I SCHEDULE OF REFUNDED OBLIGATIONS (the Refunded Obligations ) in order to lower the overall annual debt service requirements of the City, and to pay the costs associated with the issuance of the Bonds (see PLAN OF FINANCING USE OF PROCEEDS FROM THE BONDS ). PURPOSE OF THE CERTIFICATES.. Proceeds from the sale of the Certificates will be used to pay for the cost of (1) expansion and improvements to existing City administration and services buildings; (2) construction and acquisition of, and improvements to, City streets, traffic control systems, sidewalks, street lighting and drainage, including in each case the acquisition of land and rights-of-way in connection therewith; (3) the acquisition of vehicles, fire-fighting equipment, radio equipment and other equipment for authorized City purposes; (4) improvements to City sanitary sewer facilities, including in each case the acquisition of land and rights-of-way in connection therewith; (5) improvements to the City s waterworks system, including in each case the acquisition of land and rights-of-way in connection therewith; and (6) professional services incurred in connection with items (1) through (5), and to pay the costs incurred in connection with the issuance of the Certificates (see PLAN OF FINANCING USE OF PROCEEDS FROM THE CERTIFICATES ). RATINGS... BOOK-ENTRY-ONLY SYSTEM... The presently outstanding tax supported debt of the City is rated Aa2 by Moody's Investors Service, Inc. ( Moody's ) and AA by Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc. ( S&P ). The Obligations have been rated AA by S&P and Aa2 by Moody s (see OTHER INFORMATION - RATINGS ). The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( DTC ) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see THE OBLIGATIONS BOOK-ENTRY-ONLY SYSTEM ). PAYMENT RECORD... The Cityhas never defaulted in payment of its tax supported debt. [Remainder of Page Intentionally Left Blank] 6

7 SELECTED FINANCIAL INFORMATION Ratio Tax Fiscal Per Capita General Per Debt to Year Estimated Taxable Taxable Obligation Capita Taxable Percent Ended City Assessed Assessed (G.O.) G.O. Assessed Total 9/30 Population (1) Valuation (2) Valuation Tax Debt (3) Tax Debt Valuation Collections ,805 $ 6,174,641,741 $ 49,474 $ 96,976,624 $ % 98.48% ,971 6,280,537,667 49,857 97,700, % 99.86% ,018 6,446,556,172 50,753 93,949, % 98.76% ,125 6,651,867,637 51,917 90,200, % % ,241 6,808,589,094 52,681 86,570, % % ,533 7,270,123,492 55,696 79,385,000 (4) 608 (4) (4) 1.09% (5) (1) Source: The City. (2) As reported by the McLennan County Appraisal District on the City's annual State Property Tax Board Reports; subject to change during the ensuing year. (3) Payable from ad valorem taxes. This number excludes general obligation debt that is self supporting by virtue of payment from airport, water, sewer and solid waste revenues, as well as revenues from any tax increment fund. See TABLE 1-VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes and DEBT INFORMATION - TABLE 10 SELF-SUPPORTING DEBT. (4) Includes the Obligations and excludes the Refunded Obligations. (5) In process of collection. GENERAL FUND CONSOLIDATED STATEMENT SUMMARY ForFiscalYearEndedSeptember (1) 2012 (1) Beginning Balance $ 46,469,253 $ 38,623,482 $ 34,720,577 $ 31,241,750 $ 31,851,097 Total Revenue 112,209, ,763, ,716,508 97,467,794 95,532,794 Total Expenditures 106,881,584 99,918,052 98,788,896 93,988,967 96,142,141 Prior Period Adjustment , Ending Balance $ 51,797,659 $ 46,469,253 $ 38,623,482 $ 34,720,577 $ 31,241,750 (1) Certain deferred revenues were either reclassified as unearned revenues or recognized in previous year restatements. 7

8 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS City Council Title On Council Since Occupation Malcolm Duncan, Jr. Mayor June 2010 Business Executive Kyle Deaver Mayor Pro Tem June 2012 Attorney Wilbert Austin, Sr. Council Member May 2006 Pastor Alice Rodriguez Council Member May 2005 Retired Toni Herbert Council Member May 2009 Retired John Kinnaird Council Member May 2012 Investment Portfolio Manager SELECTED ADMINISTRATIVE STAFF Year Municipal Name Position Employed Experience Dale A. Fisseler, P.E. City M anager Years Wiley Stem III Assistant City Manager Years George Johnson, Jr. Assistant City Manager Years Jack Harper II Assistant City Manager Years Janice J. Andrews, C.P.A. Director of Finance Years Jennifer Richie City Attorney Years Patricia Ervin City Secretary Years CONSULTANTS AND ADVISORS Auditors... Jaynes, Reitmeier, Boyd & Therrell, P.C. Bond Counsel... Bracewell and Giuliani LLP Austin, Texas Financial Advisor...First Southwest Company, LLC Houston, Texas For additional information regarding the City, please contact: Janice J. Andrews Director of Finance City of Waco 300 Austin Avenue Waco, Texas (254) or Drew K. Masterson First Southwest Company, LLC 700 Milam Street Suite 500 Houston, Texas (713)

9 OFFICIAL STATEMENT RELATING TO $73,310,000 CITY OF WACO, TEXAS GENERAL OBLIGATION REFUNDING BONDS, SERIES 2015 AND $13,235,000 CITY OF WACO, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2015 INTRODUCTION This Official Statement, which includes the cover page and schedule and Appendices hereto, provides certain information regarding the issuance of $73,310,000 City of Waco, Texas, General Obligation Refunding Bonds, Series 2015 (the Bonds ), and $13,235,000 City of Waco, Texas, Combination Tax and Revenue Certificates of Obligation, Series 2015 (the Certificates, and, together with the Bonds, the Obligations ). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Bond Ordinance (as hereinafter defined) or in the Certificate Ordinance (as hereinafter defined). There follows in this Official Statement descriptions of the Obligations and certain information regarding the City of Waco, Texas (the City ), and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the City's Financial Advisor, First Southwest Company, Houston, Texas. DESCRIPTION OF THE CITY The City is a political subdivision and municipal corporation of the State of Texas (the State ), located in McLennan County, duly organized and existing under the laws of the State, and the City's Home Rule Charter. The City was incorporated in 1856, and first adopted its Home Rule Charter in The City operates under a Council/Manager form of government with a City Council comprised of the Mayor and five Council members who serve staggered two-year terms. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety (police and fire protection), highways and streets, water, solid waste, health and social services, culture-recreation, public transportation, planning and zoning, and general administrative services. The 2010 Census population for the City was 124,805, while the estimated 2015 population is 130,533. The City covers approximately 99 square miles. See APPENDIX A - GENERAL INFORMATION REGARDING THE CITY. SEPARATE ISSUES The Bonds and the Certificates are separate and distinct securities offerings being issued and sold independently except for the common Official Statement, and, while the Bonds and the Certificates share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including the type of obligation being offered, its terms for payment, the security for its payment, the rights of the holders, and other features. PLAN OF FINANCING PURPOSE OF THE BONDS The Bonds are being issued for the purpose of refunding a portion of the City s ad valorem tax debt described on SCHEDULE I SCHEDULE OF REFUNDED OBLIGATIONS attached to this Official Statement (the Refunded Obligations ) in order to lower the overall annual debt service requirements of the City, and to pay the costs of issuance of the Bonds. PURPOSE OF THE CERTIFICATES Proceeds from the sale of the Certificates will be used to pay for the cost of (1) expansion and improvements to existing City administration and services buildings; (2) construction and acquisition of, and improvements to, City streets, traffic control systems, sidewalks, street lighting and drainage, including in each case the acquisition of land and rights-of-way in connection therewith; (3) the acquisition of vehicles, fire-fighting equipment, radio equipment and other equipment for authorized City purposes; (4) 9

10 improvements to City sanitary sewer facilities, including in each case the acquisition of land and rights-of-way in connection therewith; (5) improvements to the City s waterworks system, including in each case the acquisition of land and rights-of-way in connection therewith; and (6) professional services incurred in connection with items (1) through (5), and to pay the costs incurred in connection with the issuance of the Certificates. REFUNDED OBLIGATIONS The principal and interest due on the Refunded Obligations are to be paid on the respective scheduled due dates or redemption dates of such Refunded Obligations, from funds to be deposited pursuant to a certain Escrow Agreement (the Escrow Agreement ) between the City and The Bank of New York Mellon Trust, N.A. Dallas, Texas (the Escrow Agent ). The ordinance passed by the City Council of the City, (the Bond Ordinance ) provides that from the proceeds of the sale of the Bonds received from the Underwriters, the City will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Obligations on their respective due dates or redemption dates. Such funds will be held by the Escrow Agent in a special escrow account (the Escrow Fund ), and with respect to proceeds required to pay the currently callable Refunded Obligations, held in cash and with respect to proceeds required to pay the Refunded Obligations that are not currently callable, used to purchase direct obligations of the United States of America (the Federal Securities ) or other legally permissible obligations appropriate for a refunding escrow under State law. Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Obligations and is not available to pay debt service on the Bonds. Grant Thornton LLP, a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriters thereof the mathematical accuracy of the schedules that demonstrate the Federal Securities or other legally permissible obligations under State law will mature and pay interest in such amounts which, together with uninvested funds in the Escrow Fund, will be sufficient to pay, when due, the principal of and interest on the Refunded Obligations in full. Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds (see OTHER INFORMATION - VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS ). These computations will be based upon information and assumptions supplied by the City. Grant Thornton LLP, has restricted its procedures to recalculating the computations provided by the City and has not evaluated or examined the assumptions or information used in the computations By the deposit of the Federal Securities or other legally permissible obligations under State law and cash, if necessary, with the Escrow Agent pursuant to the Escrow Agreement, the City will have effected the defeasance of all of the Refunded Obligations in accordance with the law. It is the opinion of Bond Counsel that as a result of such defeasance and in reliance upon the report of Grant Thornton LLP, the Refunded Obligations will be outstanding only for the purpose of receiving payments from the Federal Securities or other legally permissible obligations under State law and any cash held for such purpose by the Escrow Agent and such Refunded Obligations will not be deemed as being outstanding obligations of the City payable from taxes nor for the purpose of applying any limitation on the issuance of debt. USE OF PROCEEDS FROM THE BONDS Proceeds of the sale of the Bonds will be applied approximately as follows: Deposit to Escrow Fund $ 85,733, Underwriter's Discount 259, Costs of Issuance (1) 219, Total Uses of Funds $ 86,213, USE OF PROCEEDS FROM THE CERTIFICATES Proceeds of the sale of the Certificates will be applied approximately as follows: Deposit to Project Fund $ 13,544, Underwriter's Discount 47, Costs of Issuance (1) 85, Total Uses of Funds $ 13,678, (1) Includes Rounding Amount. 10

11 THE OBLIGATIONS DESCRIPTION OF THE OBLIGATIONS The Obligations are dated February 1, 2015, and mature on February 1 in each of the years and in the amounts shown on the inside front cover page hereof. Interest will accrue from the date of delivery, will be computed on the basis of a 360-day year consisting of twelve 30-day months, and will be payable on February 1 and August 1, commencing August 1, 2015 for the Bonds and February 1, 2016 for the Certificates until maturity or prior redemption. The definitive Obligations will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and series and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( DTC ) pursuant to the Book-Entry-Only System described herein. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations. See THE OBLIGATIONS - BOOK-ENTRY- ONLY SYSTEM. AUTHORITY FOR ISSUANCE OF THE BONDS The Bonds are issued pursuant to the Constitution and general laws of the State, particularly Chapter 1207, Texas Government Code, as amended, and the ordinance passed by the City Council of the City, (the Bond Parameters Ordinance ). In the Bond Parameters Ordinance, the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Bonds. The terms of the sale are included in a Pricing Certificate, which complete the sale of the Bonds (the Bond Parameters Ordinance and the Pricing Certificate together are referred to herein as the Bond Ordinance ). AUTHORITY FOR ISSUANCE OF THE CERTIFICATES The Certificates are issued pursuant to the Constitution and general laws of the State, including particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, Chapter 1371 Texas Government Code, and the Ordinance passed by the City Council of the City (the Certificate Parameters Ordinance ). In the Certificate Parameters Ordinance, the City Council delegated to the City Manager of the City or the Assistant City Manager of the City over Finance the authority to complete the sale of the Certificates. The terms of the sale are included in a Pricing Certificate, which complete the sale of the Certificates (the Certificate Parameters Ordinance and the Pricing Certificate together are referred to herein as the Certificate Ordinance ). SECURITY AND SOURCE OF PAYMENT OF THE BONDS The Bonds constitute direct obligations of the City, payable from the collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City. SECURITY AND SOURCE OF PAYMENT OF THE CERTIFICATES The Certificates constitute direct obligations of the City, payable from a combination of (i) the collection of a direct and continuing ad valorem tax levied, within the limits prescribed by law, on all taxable property within the City, and (ii) a limited pledge (not to exceed $1,000) of surplus revenues of the City s water and sewer system, as provided in the Certificate Ordinance. TAX RATE LIMITATION All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City limits its tax rate to $1.85 per $100 Taxable Assessed Valuation for all City purposes. Administratively, the Attorney General of Texas will permit allocation of $1.23 of the $1.85 maximum tax rate for all tax-supported debt service, as calculated at the time of issuance. OPTIONAL REDEMPTION The City reserves the right, at its option, to redeem Obligations having stated maturities on and after February 1, 2025, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 1, 2024, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Obligations are to be redeemed, the City may select the series and maturities of Obligations to be redeemed. If less than all the Obligations of any series and maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Obligations are in Book-Entry-Only form) shall determine by lot or other customary random selection method the Obligations, or portions thereof, within such series and maturity to be redeemed. If an Obligation (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Obligation (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. 11

12 NOTICE OF REDEMPTION Not less than thirty (30) days prior to a redemption date for the Obligations, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN AND ANY CONDITIONS STATED IN THE NOTICE HAVING BEEN MET (INCLUDING PROVISION OF FUNDS FOR THE PAYMENT OF THE REDEMPTION PRICE TO THE PAYING AGENT/REGISTRAR). THE OBLIGATIONS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATION OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATION OR PORTION THEREOF SHALL CEASE TO ACCRUE. In the Ordinances, the City reserves the right in the case of an optional redemption to give notice of its election or direction to redeem Obligations conditioned upon the occurrence of subsequent events. Such notice may state (i) that the redemption is conditioned upon the deposit of moneys and/or authorized securities, in an amount equal to the amount necessary to effect the redemption, with the Paying Agent/Registrar, or such other entity as may be authorized by law, no later than the redemption date or (ii) that the City retains the right to rescind such notice at any time prior to the scheduled redemption date if the City delivers a certificate of the City to the Paying Agent/Registrar instructing the Paying Agent/Registrar to rescind the redemption notice, and such notice and redemption shall be of no effect if such moneys and/or authorized securities are not so deposited or if the notice is rescinded. The Paying Agent/Registrar shall give prompt notice of any such rescission of a conditional notice of redemption to the affected registered owners. Any Obligations subject to conditional redemption where redemption has been rescinded shall remain Outstanding, and the rescission shall not constitute an Event of Default. Further, in the case of a conditional redemption, the failure of the City to make moneys and/or authorized securities available in part or in whole on or before the redemption date shall not constitute an Event of Default. DEFEASANCE The Ordinances provide that the City may discharge its obligations to the registered owners of any or all of the Obligations to pay principal, interest and redemption price thereon in any manner permitted by law. Under current State law, such discharge may be accomplished either (i) by depositing with the Comptroller of Public Accounts of the State of Texas a sum of money equal to the principal of, premium, if any, and all interest to accrue on the Obligations to maturity or redemption or (ii) by depositing with a trust company or commercial bank within certain limits prescribed by law, amounts sufficient to provide for the payment and/or redemption of the Obligations; provided that such deposits may be invested and reinvested only in (a) direct non-callable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America; (b) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the City adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the City adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent. The foregoing obligations may be in book-entry form, and shall mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment and/or redemption of the Obligations. If any of such Obligations are to be redeemed prior to their respective dates of maturity, provision must have been made for giving notice of redemption as provided in the Ordinances. Under current State law, upon such deposit as described above, such Obligations shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Obligations have been made as described above, all rights of the City to initiate proceedings to call the Obligations for redemption or take any other action amending the terms of the Obligations are extinguished; provided, however, that the right to call the Obligations for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Obligations for redemption; (ii) gives notice of the reservation of that right to the owners of the Obligations immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Obligations is to be transferred and how the principal of, premium, if any, and interest on the Obligations are to be paid to and credited by The Depository Trust Company ( DTC ), New York, New York, while the Obligations are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. 12

13 The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Obligations, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Obligations), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company ( DTC), New York, New York, will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Obligation certificate will be issued for each series and maturity of the Obligations, each in the aggregate principal amount of such series and maturity, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTC s records. The ownership interest of each actual purchaser of each Obligation ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Obligations are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Obligations, except in the event that use of the book-entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC s records reflect only the identity of the Direct Participants to whose accounts such Obligations are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Redemption notices shall be sent to DTC. If less than all of the Obligations within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, tenders, defaults, and proposed amendments to the Obligation documents. For example, Beneficial Owners of Obligations may wish to ascertain that the nominee holding the Obligations for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the register and request that copies of the notices be provided directly to them. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Obligations unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). 13

14 Principal and interest payments on the Obligations will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar of each series, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar of each series, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or Paying Agent/Registrar of each series, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to one or both series of the Obligations at any time by giving reasonable notice to the City or the respective Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Obligation certificate are required to be printed and delivered. The City may decide to discontinue the use of the system of book-entry-only transfers through DTC (or a successor depository). In that event, Obligation certificate, as appropriate, will be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement... In reading this Official Statement it should be understood that while the Obligations are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinances will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation of the City, the Financial Advisor, or the Underwriters. Effect of Termination of Book-Entry-Only System... In the event that the Book-Entry-Only System of the Obligations is discontinued, printed Obligations will be issued to the DTC Participants or the holder, as the case may be, and such Obligations will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under THE OBLIGATIONS - TRANSFER,EXCHANGE AND REGISTRATION. PAYING AGENT/REGISTRAR The initial Paying Agent/Registrar is The Bank of New York Mellon Trust Company, N.A., Dallas, Texas. In the Ordinances, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Obligations are duly paid. Any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Obligations by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. TRANSFER,EXCHANGE AND REGISTRATION In the event the Book-Entry-Only System shall be discontinued, the Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Obligations issued in an exchange or transfer of Obligations will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Obligations to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Obligations registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one series and maturity and for a like aggregate principal amount as the Obligations surrendered for exchange or transfer. See BOOK-ENTRY-ONLY SYSTEM above for a description of the system to be utilized initially in regard to ownership and transferability of the Obligations. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Obligation called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of an Obligation. 14

15 RECORD DATE FOR INTEREST PAYMENT The record date ( Record Date ) for the interest payable on the Obligations on any interest payment date means the close of business on the 15th day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest (a Special Payment Date, which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each registered owner of an Obligation appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. OBLIGATION-HOLDERS REMEDIES The Ordinances establish specific events of default with respect to the Obligations. If the City defaults in the payment of principal of or interest or redemption price on the Obligations when due or the failure by the City to make payment into any fund or funds established under the Ordinances as the same become due, or if the City defaults in the observance or performance of any of the covenants, conditions or obligations of the City, the failure to perform which materially, adversely affects the rights of the owners, including but not limited to, their prospect or ability to be repaid in accordance with the Ordinances, and the continuation thereof for a period of 60 days after notice of such default is given by any owner to the City, the Ordinances provide that any owner is entitled to seek a writ of mandamus from a court of proper jurisdiction requiring the City to make such payment or observe and perform such covenants, obligations, or conditions. The issuance of a writ of mandamus may be sought if there is no other available remedy at law to compel performance of the Obligations or the Ordinances and the City s obligations are not uncertain or disputed. The remedy of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Obligations in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinances do not provide for the appointment of a trustee to represent the interests of the owners upon any failure of the City to perform in accordance with the terms of the Ordinances, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. On June 30, 2006, the Texas Supreme Court ruled in Tookev.CityofMexia, 197 S.W.3d 325 (Tex.2006), that a waiver of immunity from suit in a contractual dispute must be provided for by statute in clear and unambiguous language. Because it is unclear whether the Texas legislature has effectively waived the City s sovereign immunity from a suit for money damages, owners may not be able to bring such a suit against the City for breach of the Obligations or the City's other covenants in the Ordinances. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City s property. Further, the registered owners cannot themselves foreclose on property within the City or sell property within the City to enforce the tax lien on taxable property to pay the principal of and interest on the Obligations. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ( Chapter 9 ). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Obligation owners of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Obligations are qualified with respect to the customary rights of debtors relative to their creditors and that all opinions relative to the enforceability of the Ordinances and the Obligations are subject to bankruptcy and other laws affecting creditors rights or remedies generally. AMENDMENTS TO THE ORDINANCES In the Ordinances, the City reserves the right to amend the Ordinances without the consent of or notice to any registered owners of the Obligations in any manner not detrimental to the interests of the registered owners for the purpose of curing any ambiguity, inconsistency, manifest error, formal defect or omission in the Ordinances. In addition, the City reserves the right, but only with the written consent of the registered owners of a majority in aggregate principal amount of the Bonds or Certificates, respectively, then outstanding, to amend, add to, or rescind any of the provisions of the Bond Ordinance or Certificate Ordinance; provided, however, that without the consent of the registered owners of all of the Bonds or Certificates, respectively, then outstanding, no amendment, addition or rescission may (i) extend the time or times of payment of the principal of and interest on such Bonds or Certificates, (ii) reduce the principal amount thereof, the redemption price, or the rate of interest on such Bonds or Certificates, (iii) give any preference to any Bonds or Certificates over any other Bond or Certificate, respectively, or (iv) reduce the aggregate principal amount of Bonds or Certificates required to be held by registered owners for consent to any such amendment, addition or rescission. 15

16 TAX INFORMATION AD VALOREM TAX LAW The appraisal of property within the City is the responsibility of the McLennan County Appraisal District (the Appraisal District ). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Property Tax Code to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and the market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property in the most recent tax year, or (2) 110% of the appraised value of the residence homestead for the preceding tax year plus the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of members appointed by the Board of Directors of the respective Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to the V.T.C.A., Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ( Article VIII ) and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Article VIII, Section 1-b, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual s spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including openspace land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000 depending upon the degree of disability or whether the exemption is applicable to a surviving spouse or children. Notwithstanding the foregoing, a disabled veteran who receives from the United States Department of Veterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran s residence homestead. Following the approval by the voters at a November 5, 2013 statewide election, a partially disabled veteran or the surviving spouse of a partially disabled veteran is entitled to an exemption equal to the percentage of the veteran s disability, if the residence was donated at no cost to the veteran by a charitable organization. 16

17 Also approved by the November 5, 2013 election, was a constitutional amendment providing that the surviving spouse of a member of the armed forces who is killed in action is entitled to a property tax exemption for all or part of the market value of such surviving spouse s residences homestead, if the surviving spouse has not remarried since the service member s death and said property was the service member s residence homestead at the time of death. Such exemption is transferable to a different property of the surviving spouse, if the surviving spouse has not remarried, in an amount equal to the exemption received on the prior residence in the last year in which such exemption was received. Article VIII, Section 1-j, provides for freeport property to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of goods in transit. Under Section of the Texas Tax Code, Goods-in-Transit are exempt from taxation unless a taxing unit opts out of the exemption. Goodsin-Transit are defined as tangible personal property that: (i) is acquired in or imported into the state to be forwarded to another location in the state or outside the state; (ii) is detained at a location in the state in which the owner of the property does not have a direct or indirect ownership interest for assembling, storing, manufacturing, processing, or fabricating purposes by the person who acquired or imported the property; (iii) is transported to another location in the state or outside the state not later than 175 days after the date the person acquired the property in or imported the property into the state; and (iv) does not include oil, natural gas, petroleum products, aircraft, dealer s motor vehicle inventory, dealer s vessel and outboard motor inventory, dealer s heavy equipment inventory, or retail manufactured housing inventory. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The City and the other taxing bodies within its territory may agree to jointly create tax increment financing zones, under which the tax values on property in the zone are frozen at the value of the property at the time of creation of the zone (see Tax Increment Financing Zone below). Other overlapping taxing units may agree to contribute all or part of future ad valorem taxes levied and collected against the value of property in the zone in excess of the frozen value to pay or finance the costs of certain public improvements in the zone. Taxes levied by the City against the values of real property in the zone in excess of the frozen value are not available for general city use but are restricted to paying or financing project costs within the zone. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. (See Tax Abatement Policy below). Cities are also authorized, pursuant to Chapter 380, Texas Local Government Code ( Chapter 380 ) to establish programs to promote state or local economic development and to stimulate business and commercial activity in the City. In accordance with a program established pursuant to Chapter 380, the City may make loans or grant of public fund for economic development purposes, however, no obligations secured by ad valorem taxes may be issued for such purposes unless approved by voters of the City. Under Article VIII, Section 1-b(h) and State law, the governing body of a county, municipality, or junior college district may provide that the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older will not be increased above the amount of taxes imposed in the year such residence qualified for such limitation. Also, upon receipt of a petition signed by 5% of the registered voters of the county, municipality or junior college district, an election held to determine by majority vote whether to establish such a limitation on taxes paid on residence homestead of persons 65 years of age or older or of persons who are disabled. The above-referenced tax limitation is transferable to (1) a different residence homestead within the city and (2) to a surviving spouse so long as the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse and the spouse was at least 55 years of age at the time of the death of the individual s spouse. If improvements (other than repairs or improvements required to comply with governmental requirements) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax limitation may not be repealed or rescinded. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE By each September 1 or as soon thereafter as practicable, the City Council adopts a tax rate per $100 taxable value for the current year. The City Council is required to adopt the annual tax rate for the City before the later of September 30 or the 60 th day after the date the certified appraisal roll is received by the City. If the City Council does not adopt a tax rate by such required date the tax rate for that tax year is the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the City for the preceding tax year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its effective tax rate and rollback tax rate. A tax rate cannot be adopted by the City Council that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings are held on the proposed tax rate following a notice of such public hearing (including the requirement that notice be posted on the City s website if the City owns, operates or controls an internet website and public notice be given by television if the City has free 17

18 access to a television channel) and the City Council has otherwise complied with the legal requirements for the adoption of such tax rate. If the adopted tax rate exceeds the rollback tax rate, the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. However, taxes levied for the payment of debt (such as the Obligations) are not subject to rollback. Effective tax rate means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). Adjusted means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. Rollback tax rate means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT Property within the City is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years of age or older and disabled taxpayers other than veterans are permitted by State law to pay taxes on homesteads in four installments with the first installment due before February 1 of each year and the final installment due before August 1.. PENALTIES AND INTEREST...Chargesforpenaltyandinterestontheunpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March April May June July After July, the penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% attorney's collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer who is 65 years of age or older or is disabled incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law allows for the collection of interest and reasonable (non-punitive) fees, costs or charges on the unpaid balance of delinquent taxes on estates in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy to the extent such fees, or charges, are provided for under the State statute under which such claim arose. The automatic stay prevents governmental units from foreclosing on property unless an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY APPLICATION OF PROPERTY TAX CODE The City grants an exemption of $5,000 to the market value of the residence homestead of persons 65 years of age or older. See TABLE 1-VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT. The City does not grant an exemption to the market value of the residence homestead of the disabled. The City grants an additional exemption of 10% of the market value of residence homesteads. The City does not tax non-business personal property or freeport property. The City does, however, tax goods-intransit. The City does not permit split payments, and discounts are not allowed. The City does collect the additional one-half cent sales tax for reduction of ad valorem taxes. The City has adopted a tax abatement policy as described below. 18

19 TAX ABATEMENT POLICY The City has established industrial and residential tax abatement programs to encourage economic development and single-family housing investment. To be considered for industrial tax abatement, a project must meet several criteria pertaining to job creation and property value enhancement. Single-family housing projects resulting in property value enhancement via new construction or improvements to existing properties in designated areas may qualify for residential tax abatement. The value of property subject to abatement is shown in TABLE 1-VALUATION,EXEMPTIONS AND GENERAL OBLIGATION DEBT. TAX INCREMENT REINVESTMENT ZONES Article VIII, Section 1-g of the State Constitution and Chapter 311, Texas Tax Code, as amended (the Act ), authorize municipalities in the State to issue tax increment bonds or notes, payable from the tax increment fund established for a reinvestment zone. In 1982, 1983, and 1986, the City Council adopted separate ordinances which created tax increment reinvestment zones number 1 ( Zone No.1 ), 2 ( Zone No.2 ) and 3 ( Zone No.3, and, together with Zone No. 1 and Zone No. 2, collectively referred to as the Zones ) pursuant to the Act, by designation of contiguous geographic areas in the jurisdiction of the boundaries of the Zones, created a board of directors for each of the Zones, established tax increment funds for each of the Zones, adopted bylaws for each of the Zones and found that public works and improvements to be undertaken in the Zones would significantly enhance the value of all taxable real property in the Zones and would generally benefit the City. Ad valorem tax collections attributable to increases in the value of taxable property in the Zones are restricted to financing improvements in the Zones. The original projected lives of the Zones were 40 years from creation. During Fiscal Year 2013 the City adopted ordinances extending the termination dates for Zone No. 1 from December 31, 2022 to December 31, 2032 and for Zone No. 2 from December 31, 2023 to December 31, The City established tax increment funds (the Funds or, for Zone No. 1, the Zone No. 1 Fund ) in the separate ordinances creating the Zones. Each participating taxing unit that levies real property taxes in the Zones provides for the collection of ad valorem taxes on real property in the Zones, as for any other property taxed by the participating taxing unit and pays into the Funds an amount equal to the tax increment produced (the Tax Increment ), less the sum of ad valorem taxes produced from the Tax Increments that are, by contract executed before the designation of the area as a reinvestment zone, required to be paid by the taxing unit to another political subdivision. The amount of a tax unit s Tax Increment for a year is the amount of property taxes levied by the taxing unit for that year on the Captured Appraised Value of real property taxable by the taxing unit and located in the Zones. The Captured Appraised Value of real property taxable by a taxing unit for a year is the total appraised value of the property for that year less the tax increment base of the taxing unit, such tax increment base being the total appraised value of all real property taxable by the taxing unit and located in the Zone for the year in which the Zone was established. The Zones have no authority to levy taxes and must look to each taxing unit to levy taxes as indicated above. The taxing units that levy ad valorem taxes in the Zones and participate in the Zones are: the City, McLennan County, Waco Independent School District and McLennan County Junior College District. The City has previously issued $4,990,000 of general obligation debt to pay for projects in Zone No. 1, of which $440,000 remains outstanding. The debt service on this portion of the outstanding debt has been internally allocated by the City as being paid from tax increment revenues in the Zone No. 1 Fund. Revenues in the Zone No. 1 Fund are not pledged to such debt and there is no guarantee that payments from the Zone No. 1 Fund will be made. If payments are not made from the Zone No. 1 Fund, the City would be required to levy ad valorem taxes in amounts sufficient to make such payments. No debt has been issued for projects in Zone No. 2 or Zone No. 3. The Zones were created to encourage physical and economic development along the Brazos River ( Brazos River Corridor ). Two of the three Zones have experienced development activity. Zone No. 1 extends along MLK Jr. Boulevard from Chapel Hill/Gurley Lane to Waco Drive, from MLK Jr. Boulevard along Elm Avenue to Garrison Street and Forrest Street. and from Herring Avenue up to Lake Shore Drive. It comprises most of the urban section of the Brazos River Corridor, venturing down into the Central Business District between IH35 and Waco Drive, then returning toward the river just north of Waco Drive to include 4th Street, Cameron Park and portions of McLennan Community College. Established in 1982 in anticipation of mixed use development, the Zone No. 1 Fund currently generates approximately $5,800,000 annually according to the City. Economic development in Zone No. 1 has accelerated due to the consolidation of State offices in the area, the rejuvenation efforts in the downtown area, the construction of new restaurants, a Marriott Residence Inn and a Courtyard Hotel in the convention center area, bicycle and pedestrian trail improvements and improvements to City conference and convention facilities in connection with redevelopment of the Hilton Hotel. Income from Zone No. 1 is currently being used to continue downtown rejuvenation projects, to extend bicycle and pedestrian trails along the Brazos River and to facilitate several commercial and residential development projects in the downtown area and 4 th & 5 Streets corridor. In its most extensive project to date, the TIF Zone No. 1 Fund has expended $11 million out of a total of approximately $36 million to be invested over a 10-year period to assist with public infrastructure improvements related to the new football stadium at Baylor University. Additional improvements are needed to continue and accelerate growth in the Zone. Zone No. 2, established in 1983, includes an area along MLK Jr. Boulevard that is adjacent to the northern boundaries of Zone No. 1 along the Brazos River. Some commercial and residential development has occurred in Zone No. 2, which Zone extends along MLK Jr. Boulevard from Waco Drive to Herring Avenue. The moderate income generated by Zone No. 2 has been used to reconstruct a section of MLK Jr. Boulevard, to partially fund the construction of a bicycle and pedestrian trail along the Brazos River and to assist with public infrastructure to facilitate construction of the River Park Apartment Homes on MLK Jr. Boulevard. 19

20 Zone No. 3 was established in 1986 in anticipation of commercial, office, residential and recreational development. Zone No. 3 encompasses the northeast intersection of Lake Shore Drive and North 19th Street. No development activity has occurred in Zone No. 3. When a tax increment reinvestment zone is established, a Board of Directors is appointed by the participating taxing entities to oversee the development of project and financing plans for the zone and to act in an advisory capacity concerning development activity and expenditure of tax increment funds in the zone. The Board for each Zone consists of five members appointed by the City Council and one member appointed by each participating taxing entity (McLennan County, Waco Independent School District and McLennan County Junior College District), for a total of eight members. Recommendations for projects originate with the Board of Directors and go to the City Council for final approval. [Remainder of Page Intentionally Left Blank] 20

21 TABLE 1-VALUATION,EXEMPTIONS AND GENERAL OBLIGATION DEBT 2014/2015 Market Valuation Established by McLennan County Appraisal District $ 8,186,437,414 (excluding totally exempt property) Less Exemptions/Reductions at 100% Market Value: Homestead $ 238,162,502 Over 65 Homesteads 34,946,211 Disabled Veterans 57,711,096 Agricultural Land Use/Timber Productivity Loss 71,196,969 Fiscal Abatements 93,661,856 Freeport Loss 354,175,027 Pollution Control 28,852,629 Limited Value 36,854,917 Miscellaneous 752, ,313, /2015 Taxable Assessed Valuation $ 7,270,123,492 General Obligation Debt (as of 2/1/15) (1)(2) Combination Tax & Revenue Certificates of Obligation (1) $ 85,600,000 General Obligation Bonds 117,910,000 The Bonds 73,310,000 The Certificates 13,235,000 $ 290,055,000 City's Self-Supporting General Obligation Debt (as of 2/1/15) (2) Water System General Obligation Debt $ 142,790,000 Sewer System General Obligation Debt 63,505,000 Solid Waste System General Obligation Debt 4,005,000 Tax Increment Zone 1 General Obligation Debt 370,000 $ 210,670,000 Net General Obligation Debt Payable from Ad Valorem Taxes $ 79,385,000 Ratio of Net General Obligation Debt to Taxable Assessed Valuation 1.09% 2015 Estimated Population - 130,533 (3) Per Capita Taxable Assessed Valuation - $55,696 Per Capita Funded Debt - $608 (1) In the past several years, the City has sold combination tax and revenue certificates of obligation to finance projects for the City s water system, sewer system, airport system, tax increment zones and solid waste system and has internally allocated portions of this debt as payable from the respective enterprise funds or tax increment zone fund. The self-supporting amounts listed above are projections of debt that is expected to be retired by the City based on actual historical payments from these funds to pay for debt service on the outstanding certificates of obligation. There is no guarantee that payments from these funds will continue in the future. If payments are not made from such sources in the future, the City will be required to levy ad valorem taxes in amounts sufficient to make such payments. Also, the above schedule of indebtedness does not include $1,124,000 of special assessment revenue bonds, as such bonds are payable solely from property owner assessments and do not represent a general obligation of the City. See TABLE 10 SELF-SUPPORTING DEBT. (2) Includes the Obligations and excludes the Refunded Obligations. (3) Source: The City. 21

22 TABLE 2 TAXABLE ASSESSED VALUATION BY CATEGORY Taxable Appraised Value, Fiscal Year Ending September %of %of %of Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $ 3,330,608, % $ 3,193,078, % $ 3,145,755, % Real, Residential, Multi-Family 600,033, % 552,903, % 540,947, % Real, Vacant Lots/Tracts/Res Inventory 192,366, % 185,737, % 161,765, % Real, Acreage (Land Only) 74,636, % 66,466, % 73,968, % Real, Farm and Ranch Improvements 32,499, % 28,871, % 18,486, % Real, Commercial and Industrial 2,051,472, % 1,885,152, % 1,839,811, % Real and Tangible Personal, Utilities 177,491, % 147,349, % 140,452, % Tangible Personal, Business 1,724,904, % 1,674,043, % 1,667,295, % Tangible Personal, Other 2,424, % 2,328, % 2,236, % Total Appraised Value Before Exemptions $ 8,186,437, % $ 7,735,929, % $ 7,590,718, % Less: Total Exemptions/Reductions 916,313, ,340, ,850,655 Taxable Assessed Value $ 7,270,123,492 $ 6,808,589,094 $ 6,651,867,637 Taxable Appraised Value, Fiscal Year Ending September %of %of Category Amount Total Amount Total Real, Residential, Single-Family $ 2,964,790, % $ 2,899,061, % Real, Residential, Multi-Family 530,246, % 527,542, % Real, Vacant Lots/Tracts 159,734, % 158,194, % Real, Acreage (Land Only) 73,351, % 72,134, % Real, Farm and Ranch Improvements 19,298, % 19,050, % Real, Commercial and Industrial 1,820,432, % 1,769,330, % Real and Tangible Personal, Utilities 138,700, % 142,912, % Tangible Personal, Business 1,566,759, % 1,473,384, % Tangible Personal, Other 2,442, % 2,054, % Total Appraised Value Before Exemptions $ 7,275,757, % $ 7,063,665, % Less: Total Exemptions/Reductions 829,201, ,127,564 Taxable Assessed Value $ 6,446,556,172 $ 6,280,537,667 NOTE: Valuations shown are certified taxable assessed values reported by the McLennan County Appraisal District to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. 22

23 TABLE 3-VALUATION AND GENERAL OBLIGATION DEBT HISTORY G.O. Ratio of Taxable Tax Debt G.O. Tax Debt Taxable Assessed Outstanding to Taxable G.O. Fiscal Year Estimated Assessed Valuation at End Assessed Tax Debt Ended 9/30 Population (1) Valuation (2) PerCapita ofyear (3) Valuation Per Capita ,805 $ 6,174,641,741 $ 49,474 $ 96,976, % $ ,971 6,280,537,667 49,857 97,700, % ,018 6,446,556,172 50,753 93,949, % ,125 6,651,867,637 51,917 90,200, % ,241 6,808,589,094 52,681 86,570, % ,533 7,270,123,492 55,696 79,385,000 (4) 1.09% (4) 608 (4) (1) Source: The City. (2) As reported by the McLennan County Appraisal District on City's annual State Property Tax Board Reports; subject to change during the ensuing year. (3) Payable from ad valorem taxes. This number excludes general obligation debt that is self supporting by virtue of payment from airport, water, sewer and solid waste revenues, as well as revenues from any tax increment fund. See TABLE 1-VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes and TABLE 10 SELF-SUPPORTING DEBT. (4) Projected, includes the Obligations and excludes the Refunded Obligations. TABLE 4-TAX RATE,LEVY AND COLLECTION HISTORY Fiscal Year General Interest and Gross % Current % Total Ended 9/30 Tax Rate Fund Sinking Fund Tax Levy Collections Collections 2010 $ $ $ $ 48,679, % 98.48% ,125, % 99.86% ,805, % 98.76% ,878, % % ,184, % % ,433,025 (1) (1) (1) In process of collection. TABLE 5-TEN LARGEST TAXPAYERS 2014/2015 % of Total Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation Mars Snackfood US LLC (1) Candy Manufacturer $ 106,799, % Coca Cola Company Soft Drink Bottler 98,357, % L-3 Communications Integrated Systems LP Aircraft Components Manufacturer 76,263, % Allergan, Inc. Eye Care Manufacturer 62,045, % Oncor Electric Delivery Co. Utility 57,638, % Inland Western Waco Central, L.P. Retail Shopping Center 53,760, % Caterpillar Logistics Services, Inc. Parts Warehouse 46,083, % Associated Hygienic Products LLC Disposable Diaper Manufacturer 45,990, % CBL/Richland Mall, L.P. Retail Shopping Center 42,291, % Tractor Supply Company of Texas LLP Farm Products Distribution Center 41,891, % $ 631,122, % (1) Includes Wrigley Manufacturing GENERAL OBLIGATION DEBT LIMITATION...NogeneralobligationdebtlimitationisimposedontheCityunder current State law or thecity'shomerulecharter(see THEOBLIGATIONS-TAX RATE LIMITATION ). 23

24 TABLE 6-TAX ADEQUACY (1) 2015 General Obligation Debt Service Requirements $ 29,250,886 $ Tax Rate at 98% Collection Produces 29,254, General Obligation Less Self-Supporting Debt Service Requirements $ 8,931,557 $ Tax Rate at 98% Collection Produces 8,934,400 Average Annual General Obligation Debt Service Requirements ( ) $ 18,258,127 $ Tax Rate at 98% Collection Produces 18,260,660 Average Annual General Obligation Less Self-Supporting Debt Service Requirements ( ) $ 5,308,209 $ Tax Rate at 98% Collection Produces 5,315,042 Maximum Annual General Obligation Debt Service Requirements (2017) $ 29,774,824 $ Tax Rate at 98% Collection Produces 29,781,334 Maximum Annual General Obligation Less Self-Supporting Debt Service Requirements (2016) $ 9,149,259 $ Tax Rate at 98% Collection Produces 9,155,267 (1) Projected, includes the Obligations and excludes the Refunded Obligations. See TABLE 1-VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes and TABLE 10 SELF-SUPPORTING DEBT. TABLE 7-ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ( Tax Debt ) was developed from information contained in Texas Municipal Reports published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional bonds since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City. Estimated City's 2013/2014 Taxable 2013/2014 Total % Overlapping Assessed Value Tax Rate G.O. Debt (2) Applicable Net G.O. Debt City of Waco $ (1) 7,270,123,492 $ (1) $ (3) 79,385, % $ 79,385,000 Bosqueville ISD 126,720, ,757, % 7,121,349 China Spring ISD 569,033, ,505, % 17,797,006 Connally ISD 563,601, ,190, % 3,630,748 La Vega ISD 643,920, ,197, % 15,203,824 Lorena ISD 392,774, ,694, % 799,940 McGregor ISD 274,213, ,893, % 26,283 McLennan County 11,599,075, ,250, % 10,712,750 McLennan Co. Jr. College Dist. 12,621,448, ,605, % 43,206,135 Midway ISD 3,588,993, ,324, % 57,364,699 Waco ISD 3,864,912, ,800, % 170,278,200 Total Direct and Overlapping Tax Funded Debt $ 405,525,933 Ratio of Direct and Overlapping Tax Funded Debt to Taxable Assessed Valuation 5.58% Per Capita Overlapping Tax Funded Debt $ 3,107 (1) 2014/2015 Taxable Assessed Valuation (2) Total General Obligation Debt as of November 30, (3) Includes the Obligations, excludes the Refunded Obligations and self-supporting debt. See TABLE 1-VALUATION,EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes and TABLE 10 SELF-SUPPORTING DEBT. 24

25 DEBT INFORMATION TABLE 8 GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS Outstanding Less: Total Less: % of Year General Refunded General Existing Self- Net General Total End Obligation Debt Plus: The Bonds Plus: The Certificates Obligation Supporting Obligation Principal 9/30 Debt Service (1) Service (1) Principal Interest Total Principal Interest Total Debt Service Debt Service (1)(2) Debt Service (1)(2) Retired 2015 $ 29,624,003 $ 1,865,249 $ 1,492,132 $ 1,492,132 $ 29,250,886 $ 20,319,329 $ 8,931, ,230,251 4,715,398 $ 840,000 3,413,050 4,253,050 $ 345,000 $ 559,425 $ 904,425 29,672,329 20,523,070 9,149, ,332,078 4,714, ,000 3,387,350 4,252, , , ,794 29,774,824 20,778,745 8,996, ,655,381 4,726, ,000 3,351,850 4,261, , , ,144 29,099,878 20,109,070 8,990, ,267,518 4,716, ,000 3,314,950 4,249, , , ,244 28,709,624 20,197,360 8,512, % ,234,185 10,352,143 6,190,000 3,141,500 9,331, , , ,144 28,120,686 19,977,744 8,142, ,357,744 10,382,895 6,535,000 2,823,375 9,358, , , ,794 27,244,018 19,042,391 8,201, ,250,881 10,319,371 6,810,000 2,489,750 9,299, , , ,194 25,140,454 17,382,788 7,757, ,930,313 10,330,136 7,170,000 2,140,250 9,310, , , ,394 23,817,820 16,336,881 7,480, ,740,943 10,341,463 7,550,000 1,772,250 9,322, , , ,344 23,632,074 16,343,989 7,288, % ,111,597 10,356,039 7,950,000 1,384,750 9,334, , , ,744 20,997,052 13,898,349 7,098, ,533,316 10,372,713 8,375, ,625 9,351, , , ,244 18,418,471 11,550,279 6,868, ,042,453 6,750,705 5,425, ,750 6,083, , , ,744 18,280,241 11,594,378 6,685, ,001,438 1,688, , ,375 1,520, , , ,144 13,740,436 11,931,094 1,809, ,949,924 1,687,870 1,035, ,975 1,519, , , ,344 12,690,373 11,163,622 1,526, % ,949,647 1,694,463 1,075, ,325 1,528, , , ,344 12,691,853 11,164,147 1,527, ,488,417 1,698,050 1,120, ,200 1,529, , , ,194 11,225,761 10,061,459 1,164, ,936,281 5,277,413 4,465, ,900 4,756, ,000 92, ,119 10,322,888 9,709, , ,294,541 1,519,188 1,190, ,800 1,368, ,000 67, ,369 8,046,522 7,663, , ,171,747 1,520,013 1,240, ,200 1,370, ,000 41, ,406 6,923,341 6,695, , % ,334,853 1,524,375 1,295,000 79,500 1,374, ,000 13, ,984 6,093,963 5,977, , ,456,256 1,517,000 1,340,000 26,800 1,366,800 4,306,056 4,306, ,737,375 1,737,375 1,737, % $ 413,631,139 $ 118,069,984 $ 73,310,000 $ 32,926,657 $ 106,236,657 $ 13,235,000 $ 4,904,110 $ 18,139,110 $ 419,936,922 $ 308,464,523 $ 111,472,399 (1) Does not include lease/purchase obligations. See OTHER OBLIGATIONS. (2) See TABLE 1 VALUATION,EXEMPTIONS AND GENERAL OBLIGATION DEBT and the accompanying footnotes and TABLE 10 SELF-SUPPORTING DEBT. 25

26 TABLE 9-INTEREST AND SINKING FUND BUDGET PROJECTION Net General Obligation Debt Service Requirements, Fiscal Year Ending 9/30/2015 (1) $ 8,931,557 Interest and Sinking Fund as of 9/30/2014 $ 181,727 Budgeted Interest and Sinking Fund Tax Levy 9,101,205 Estimated Investment Income 1,460 9,284,392 Estimated Balance, 9/30/2015 $ 352,835 (1) Projected, includes the Obligations and excludes the Refunded Obligations and self-supporting debt. TABLE 10 SELF-SUPPORTING DEBT Fiscal TaxIncrement Total Self- Total Tax- Year Water Sewer Solid Waste Reinvestment Supporting Debt Supported debt 9/30 System (1)(2) System (1)(2) System (1) Zone (1) Service (1)(2) Service (1) 2015 $ 13,273,407 $ 6,088,269 $ 869,525 $ 88,128 $ 20,319,329 $ 8,931, ,389,327 6,463, ,650 40,600 20,523,070 9,149, ,586,449 6,486, ,775 74,150 20,778,745 8,996, ,942,486 6,456, ,150 76,650 20,109,070 8,990, ,004,190 6,480, ,319 74,050 20,197,360 8,512, ,936,104 6,324, ,019 80,875 19,977,744 8,142, ,430,349 5,893, ,150 82,000 19,042,391 8,201, ,732,041 5,339, ,375-17,382,788 7,757, ,120,448 4,909, ,375-16,336,881 7,480, ,122,855 4,908, ,625-16,343,989 7,288, ,760,841 4,137, ,898,349 7,098, ,742,021 3,808, ,550,279 6,868, ,867,139 3,727, ,594,378 6,685, ,076,738 3,854, ,931,094 1,809, ,429,678 3,733, ,163,622 1,526, ,428,016 3,736, ,164,147 1,527, ,547,316 3,514, ,061,459 1,164, ,383,088 3,326, ,709, , ,526,441 1,137, ,663, , ,905, , ,695, , ,596, , ,977, , ,306, ,306, ,737, ,737,375 - $ 210,844,054 $ 91,498,053 $ 5,605,963 $ 516,453 $ 308,464,523 $ 111,472,399 (1) In the past several years, the City has sold combination tax and revenue certificates of obligation to finance projects for the City s water system, sewer system, airport system, tax increment zones and solid waste system and has internally allocated portions of this debt as payable from the respective enterprise funds or tax increment zone fund. The self-supporting amounts listed above are projections of debt that is expected to be retired by the City based on actual historical payments from these funds to pay for debt service on the outstanding certificates of obligation. There is no guarantee that payments from these funds will continue in the future. If payments are not made from such sources in the future, the City will be required to levy ad valorem taxes in amounts sufficient to make such payments. Also, the above schedule of indebtedness does not include $1,124,000 of special assessment revenue bonds, as such bonds are payable solely from property owner assessments and do not represent a general obligation of the City. (2) Includes a portion of the Obligations and excludes the Refunded Obligations. 26

27 AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS The City has no voter authorized but unissued general obligation bonds. ANTICIPATED ISSUANCE OF GENERAL OBLIGATION DEBT...The City does not anticipate the issuance of additional general obligation debt within the next 12 months. See FINANCIAL INFORMATION CAPITAL IMPROVEMENT PROGRAM for information regarding the City s financing program for capital improvements. OTHER OBLIGATIONS The City has entered into an agreement with the City of West, Texas, to supply water to the City of West for 40 years pursuant to an agreed-upon rate structure. As part of the agreement, the City purchased a pump station and water transmission line from the City of West for $12,814 monthly for 18 years and $6,632 monthly for 22 years. Interest is imputed at 4.35% over the term of the agreement. Fiscal Year Annual Ending 9/30 Principal Interest Payment 2015 $ 72,555 $ 81,208 $ 153, ,777 77, , ,142 74, , ,657 71, , ,328 67, , , , , , , , , , , , , , ,063 54, , ,387 1,563 72,950 $ 1,898,438 $ 1,223,414 $ 3,121,852 The City has the following outstanding lease/purchase obligations at this time, which are supported by General Fund Revenues. The assets acquired are computer equipment and software. Fiscal Year M inimum Ending Annual 9/30 Payment ,485 Total Minimum Lease Payment $ 12,485 Amount Representing Interest 42 Present Value of Minimum Lease Payments $ 12,443 PENSION FUND...The City provides pension benefits for all of its full-time employees through the Texas Municipal Retirement System ( TMRS ), a State-wide administered pension plan. The City makes annual contributions to the plan equal to the amounts accrued for pension expense. (For more detailed information concerning the retirement plan, see APPENDIX B- EXCERPTS FROM THE CITY OF WACO, TEXAS ANNUAL FINANCIAL REPORT - Note IV, M.) During 2009 TMRS changed certain actuarial assumptions. These changes impacted the City s pension contribution rate. Consequently, the City elected to fund contributions through an eight year phase-in period resulting in an $11.7 million of net pension obligation as of September 30, The City's net pension obligation was $11.8 million as of September 30, During the FY2012 budget process, the City worked with TMRS to evaluate plan provisions. As a result, the City council voted to eliminate automatic annually repeating annuity increases for retirees in favor of considering future annuity increases on an ad hoc basis. This plan provision change reduced the January 2012 contribution from a 20.07% phase-in rate (22.24% full rate) to a 14.04% full rate. In addition to the fund restructuring of TMRS as approved by Senate Bill 350, retirement and benefits legislation adopted by the Texas Legislature in 2011, this City plan provision change increased the City s funded ratio from 55.6% to 86.5%. 27

28 In October 2013, the TMRS Board approved actuarial changes in (a) the funding method from the Projected Unit Credit actuarial method to Entry Age Normal (EAN), (b) the post-retirement mortality assumptions, and (c) the amortization policy. These changes were effective with the December 31, 2013 actuarial valuation. TMRS indicates that the move to EAN will provide more stability in employer contribution rates and allow for an easier transition to the new GASB standards. The City's funded ratio decreased to 85% primarily due to changing to the EAN actuarial method. Without this change in method, the City's funded ratio would have increased to 90.4%. The City's full contribution rate effective January 2015 is 13.15%. OTHER POST-EMPLOYMENT BENEFITS... In addition to pension benefits, the City provides certain other post-employment benefits for retired employees ( OPEB ). The costs of these benefits are recognized as expenditures based on the annual required contribution of the employer. (For more detailed information concerning OPEB, see APPENDIX B- EXCERPTS FROM THE CITY OF WACO,TEXAS ANNUALFINANCIAL REPORT Note IV,K.) Life Insurance Benefits: The City provides postretirement life insurance benefits for certain eligible retirees. According to City s personnel policy, retirees who have retired under the Texas Municipal Retirement System with a minimum of 20 years of service are eligible for postretirement life insurance benefits. The City pays 100 percent of the premiums of life insurance coverage for the eligible retirees. An optional $5,000 of life insurance coverage is available at the retirees' expense. At September 30, 2014, there were 272 employees who had retired and were receiving benefits. The City finances the plan on a pay-as-you-go basis. Life insurance benefits amounted to $21,772 for Health Insurance Benefits: Eligible City retirees may elect upon retirement to participate, at the retirees sole expense, in the City s self-insured health insurance plan. If retirees do not elect to participate in the City-sponsored health insurance plan at the time they retire or if they terminate their participation in the plans after retirement they may not later rejoin any of the plans. The City pays no portion of the retiree health insurance premiums. Current retiree health insurance premiums have been determined and set independently of premiums for active employees at levels intended to cover the full cost of retiree health insurance benefits. As of September 2014, there were 23 retirees participating in the City s self-insured health insurance plan. [Remainder of Page Intentionally Left Blank] 28

29 FINANCIAL INFORMATION TABLE 11 GOVERNMENTAL ACTIVITIES:CHANGE IN NET POSITION For Fiscal Year Ended September Governmental Business-type Governmental Business-type Governmental Business-type Activities Activities Activities Activities Activities Activities Revenues: Program Revenues: Charges for Services $ 8,274,277 $ 86,092,057 $ 6,298,141 $ 88,204,469 $ 5,624,765 $ 85,531,254 Operating Grants and Contributions 10,924,393 3,869,760 11,500,355 3,419,959 11,640,290 3,415,770 Capital Grants and Contributions 3,272,066 1,682,452 7,256,153 4,836,705 6,883,729 3,786,143 General Revenues: Ad valorem Taxes 57,159,819-57,100,563-54,377,202 - Sales Taxes 33,487,659-31,075,760-29,186,254 - Franchise Taxes 14,181,593-13,405,186-13,682,123 - Hotel/Motel Taxes - 2,403,171-2,095,987-1,897,865 Other Taxes 785, , ,815 - Investment Earnings 323, , , , , ,566 Miscellaneous 1,196,841-2,153, ,450 - Gain on sale of capital assets 105, ,376-1,730,200 - Total Revenues $ 129,711,591 $ 94,244,786 $ 130,064,696 $ 98,716,583 $ 125,018,389 $ 94,827,598 Expenses: General Government 16,223,167-20,039,649 - $ 14,177,640 $ - Public Works 12,205,449-13,699,976-11,844,356 - Public Safety 66,630,254-62,592,351-57,664,131 - Culture and Recreation 16,922,912-16,544,389-15,694,840 - Public Health 7,314,101-7,388,363-7,184,384 - Housing & Community Development 2,974,293-2,255,720-3,664,525 - Interest on Long-Term Debt 3,631,452-3,798,174-4,098,714 - Water - 32,998,874-33,038,145-33,311,059 Wastewater - 19,263,583-18,432,230-17,634,339 Solid Waste - 15,794,559-16,033,246-15,854,254 Airport - 3,284,396-3,083,925-2,937,967 Convention Services - 3,957,683-3,941,005-3,372,280 Ranger Hall of Fame - 1,326,695-1,343,575-1,209,145 Cameron Park Zoo - 4,494,173-4,318,267-4,396,640 Transit Services - 8,177,708-8,046,015-7,970,314 Cottonwood Creek Golf Course - 1,810,707-1,782,963-1,864,426 Total Expenditures $ 125,901,628 $ 91,108,378 $ 126,318,622 $ 90,019,371 $ 114,328,590 $ 88,550,424 Increases in net position before transfers $ 3,809,963 $ 3,136,408 $ 3,746,074 $ 8,697,212 $ 10,689,799 $ 6,277,174 Transfers $ 902,991 $ (902,991) $ 81,051 $ (81,051) $ (2,555,596) $ 2,555,596 Cumulative effect of change in accounting principals $ - $ - $ (881,234) $ (1,752,824) $ - $ - Prior Period Adjustments ,101 1,122, Net Position - October 1 228,754, ,530, ,017, ,544, ,883, ,711,982 Net Position - September 30 $ 233,467,441 $ 278,763,591 $ 228,754,487 $ 276,530,174 $ 225,017,495 $ 268,544,752 29

30 TABLE 11A GENERAL FUND REVENUES AND EXPENDITURE HISTORY For Fiscal Year Ended September (1) 2012 (1) Revenues: Taxes $ 75,866,868 $ 72,988,945 $ 67,712,642 $ 65,587,020 $ 63,645,465 Business and Occupation Fees 14,181,593 13,405,186 13,682,123 13,587,115 13,338,717 Permits, Licenses and Fees 1,348,415 1,170, , , ,627 Fines 2,416,605 1,807,306 1,565,721 1,729,398 1,950,230 Charges for Services 1,639,054 1,643,861 1,501,983 1,779,213 1,751,702 Investment Earnings 145, , , , ,497 Contributions 883, , , , ,964 Intergovernmental 1,682,910 1,568,064 1,497,372 1,390,686 1,553,028 Program Income ,000 Other 9,256,237 9,754,703 8,533,937 8,099,146 7,748,423 Total Revenues $ 107,420,832 $ 102,839,016 $ 95,765,365 $ 93,392,366 $ 91,831,653 Expenditures: Current: General Government $ 17,230,269 $ 16,189,167 $ 16,953,812 $ 15,550,216 $ 16,204,299 Public Works 2,583,490 3,214,854 1,863,173 1,791,523 2,235,645 Public Safety 60,162,734 57,762,483 53,938,989 54,524,611 55,583,806 Culture and Recreation 12,926,462 11,946,865 14,503,772 12,438,048 12,742,857 Housing and Community Development 192, , , , ,921 Total Expenditures $ 93,095,102 $ 89,290,905 $ 87,392,779 $ 84,433,057 $ 86,906,528 Excess of Revenues Over Expenditures $ 14,325,730 $ 13,548,111 $ 8,372,586 $ 8,959,309 $ 4,925,125 Other Financing Sources (Uses): Proceeds from Sale of Capital Assets $ 105,278 $ 290,376 $ 1,790,086 $ 123,833 $ - Transfers In 4,683,880 4,634,431 4,161,057 3,951,595 3,701,141 Transfers Out (13,786,482) (10,627,147) (11,396,117) (9,555,910) (9,235,613) Total Other Financing Sources (Uses) $ (8,997,324) $ (5,702,340) $ (5,444,975) $ (5,480,482) $ (5,534,472) Net Change in Fund Balance $ 5,328,406 $ 7,845,771 $ 2,927,611 $ 3,478,827 $ (609,347) Fund Balance, Beginning of Year $ 46,469,253 $ 38,623,482 $ 34,720,577 $ 31,241,750 $ 31,851,097 Prior Period Adjustment $ - $ - $ 975,294 $ - $ - Fund Balance, End of Year $ 51,797,659 $ 46,469,253 $ 38,623,482 $ 34,720,577 $ 31,241,750 (1) Certain deferred revenues were either reclassified as unearned revenues or recognized in previous year restatements. 30

31 TABLE 12 ENTERPRISE FUNDS:NET REVENUES AVAILABLE FOR DEBT SERVICE Water and Solid Waste Tax Increment Wastewater System System Financing Zone Revenues as of 9/30/2014 $ 60,346,778 $ 16,900,127 $ 7,081,903 Expenditures as of 9/30/2014 (Excluding Depreciation) 35,497,646 12,583,037 7,161,912 Net Revenues Available for Debt Service, 9/30/2014 $ 24,849,132 $ 4,317,090 $ (3) (80,009) Estimated 2015 Debt Service Allocable to System or Tax Increment Zone Fund $ 19,361,676 (1)(2) $ 869,525 (1)(2) $ 88,128 (1) (1) Includes a portion of the Bonds and excludes portions of the Refunded Obligations. (2) Includes a portion of the Certificates. (3) The Zone closed FY 2014 with Fund Balance of $9,103,369. TABLE 13 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, Chapter 321, Tax Code, V.T.CA which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Obligations. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts of the State of Texas (the Comptroller ), who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. On August 8, 1987, the voters of the City approved the imposition of an additional sales and use tax of one-half of one percent (½ of 1%), which tax is in effect until the voters repeal it. Fiscal Year % of Equivalent of Ended Total Ad Valorem Ad Valorem Per 9/30 Collected Tax Levy Tax Rate Capita (1) 2009 $ 27,714, % $ 0.46 $ ,318, % ,003, % ,186, % ,075, % ,487, % (1) Based on estimated population as shown in TABLE 3 VALUATION AND GENERAL OBLIGATION DEBT HISTORY. CAPITAL IMPROVEMENT PROGRAM The City s Capital Improvement Program calls for the following bond issuance schedule. Fiscal Year General Water Wastewater Ending 9/30 Obligation System System Total 2015 $ 1,750,000 $ 6,205,000 $ 5,715,000 $ 13,670, ,855,044 8,538,000 19,175,000 29,568, ,950, ,000 22,845,000 25,447, ,120, , ,000 3,275, ,685,148 2,585,000 2,165,000 6,435,148 $ 9,361,288 $ 18,540,000 $ 50,495,000 $ 78,396,288 (1) (1) Included in the Obligations. 31

32 WATERWORKS AND SEWER SYSTEM THE FOLLOWING INFORMATION IS PROVIDED BECAUSE IN RECENT HISTORY, THE CITY HAS BEEN PAYING DEBT SERVICE ON A PORTION OF ITS OUTSTANDING GENERAL OBLIGATION TAX DEBT WITH REVENUES FROM ITS WATER AND SEWER SYSTEM AND BECAUSE THE CERTIFICATES ARE SECURED BY A LIMITED PLEDGE, NOT TO EXCEED $1,000, OF THE SURPLUS REVENUES OF THE CITY S WATER AND SEWER SYSTEM. ALTHOUGH THE CITY CURRENTLY MAKES USE OF WATER AND SEWER SYSTEM REVENUE TO PAY CERTAIN OF ITS INDEBTEDNESS, THERE IS NO PLEDGE OF SUCH REVENUES TO SECURE THE OBLIGATIONS EXCEPT FOR THE LIMITED $1,000 PLEDGE SECURING THE CERTIFICATES. SEE THE OBLIGATIONS SECURITY AND SOURCE OF PAYMENT OF THE CERTIFICATES AND TABLE 10 PRO FORMA SELF-SUPPORTING DEBT. WATER SYSTEM The City obtains a large preponderance of its domestic and industrial surface water supply from the Lake Waco reservoir. Lake Waco was constructed by the United States Army Corps of Engineers to provide flood control and water conservation storage. Construction started in June 1958, and deliberate impoundment began in February The lake inundated the old Lake Waco which was built in 1929 about 3,000 feet upstream from the new dam. The City received 13,026 acre-feet of priority storage rights in the new lake in exchange for the like amount of storage capacity of the old lake. In 1958, with initiation of construction of the new lake, the City contracted with the Brazos River Authority (the BRA ), the official agent for the State in the project, for purchase of the remaining 104,100 acre-feet of water supply storage in Lake Waco. In order to expand its water supply, in 1998, the City authorized the United States Army Corps of Engineers, through BRA, to raise the conservation level of Lake Waco by seven (7) feet. The project was completed in Deliberate impoundment for the pool raise began September 1, This pool raise action has increased the City s diversion right from 59,100 acre-feet to 79,100 acrefeet annually. In addition to Lake Waco water rights, the City has a permit, dated June 29, 1914, to withdraw up to 5,600 acre-feet annually from the Brazos River for municipal purposes. The City s water treatment facilities currently consist of two plants with an aggregate design per day. Treated water storage capacity totals million gallons. Average daily water sold during 2014 was million gallons per day ( mgd ), while average daily water treated was mgd. WASTEWATER TREATMENT In 1968, the City entered into a contract with the BRA, which provided for BRA to establish a regional wastewater treatment system, the Waco Metropolitan Area Regional Sewer System ( WMARSS ), and to adequately receive, transport, treat and dispose of the City's wastewater. During 2004, the City of Waco entered into an interlocal cooperation agreement (the Agreement ) with the surrounding cities of Bellmead, Woodway, Robinson, and Lacy Lakeview to acquire the WMARSS from the BRA. The participating cities each purchased undivided ownership interests in the WMARSS. Subsequent to the original purchase, the City of Hewitt exercised an option to purchase a portion of Waco s undivided interest. Additionally, the City of Lorena has purchased a portion of the undivided interest of each of the other participating cities. Waco currently owns a 75.27% undivided interest in the WMARSS. Under the Agreement, a board was created to oversee the operation and administration of the WMARSS. Pursuant to a separate interlocal agreement, the City of Waco was designated the entity to manage and operate the WMARSS. Each participant pays a proportionate share of the operation and maintenance costs of the WMARSS based on the ratio of each city s flows to the sum of the flows of all cities. Waco was allocated % of the WMARSS operation and maintenance costs for 2013 and % for For 2015, Waco is being allocated % of such costs. 32

33 MONTHLY WATER RATE (EFFECTIVE:OCTOBER 1, 2010) Inside City Limits Outside City Limits Residential Residential Water Base Rate $15.00 minimum $17.40 minimum 0 to 15,000 gallons $2.54 per 1,000 gallons $2.92 per 1,000 gallons 15,001 to 25,000 gallons $2.98 per 1,000 gallons $3.43 per 1,000 gallons Over 25,000 gallons $3.82 per 1,000 gallons $4.40 per 1,000 gallons Residential Demand Rates 5/8 meter $15.00 $ meter $24.24 $ meter $34.90 $ meter $48.10 $ meter $75.94 $87.48 Irrigation Meters 5/8 meter $15.00 minimum $17.40 minimum 1 meter $41.58 minimum $47.97 minimum 1.5 meter $74.62 minimum $85.96 minimum 2 meter $ minimum $ minimum 3 meter $ minimum $ minimum 4 meter $ minimum $ minimum 6 meter $ minimum $ minimum 8 meter $ minimum $ minimum 10 meter $ minimum $1, minimum Irrigation from 0 to 25,000 gallons $2.98 per 1,000 gallons $3.53 per 1,000 gallons Irrigation over 25,000 gallons $3.82 per 1,000 gallons $4.50 per 1,000 gallons Commercial/Industrial classes $2.68 per 1,000 gallons $3.08 per 1,000 gallons Pretreated irrigation all classes $1.33 per 1,000 gallons $1.67 per 1,000 gallons MONTHLY WASTEWATER RATE (EFFECTIVE:OCTOBER 1, 2010) Rates for residences are computed taking the average of the actual water consumption for the months of November, December, January and February, up to 20,000 gallons. New residences that did not have adequate consumption statistics during such months and new turn-ons are given an average consumption of 6,000 gallons. The monthly service charge is then based on the lesser of the foregoing consumption determination or actual water meter consumption. Inside City Limits Outside City Limits Residential Base Rate $13.00 minimum $16.79 minimum Volumetric Rate $2.89 per 1,000 gallons $4.70 per 1,000 gallons Non-residential ¾ meter $13.00 minimum $16.79 minimum 1 meter $18.85 minimum $24.19 minimum 1.5 meter $28.63 minimum $36.52 minimum 2 meter $40.36 minimum $51.31 minimum 3 meter $55.99 minimum $74.04 minimum 4 meter $71.64 minimum $90.77 minimum 6 meter $ minimum $ minimum 8 meter $ minimum $ minimum 10 meter $ minimum $ minimum Volumetric Rate $2.89 per 1,000 gallons $4.70 per 1,000 gallons 33

34 TABLE 14 CONDENSED SUMMARY OF OPERATIONS For Fiscal Year Ended September Revenues: Sale of Water - Metered $ 30,826,879 $ 33,343,542 $ 32,851,950 $ 35,926,905 $ 28,648,036 Sale of Water - Other 4,942,218 4,497,515 3,335,226 3,597,597 3,328,783 Sewer Service Charges 20,868,723 21,315,894 21,105,345 21,282,773 19,180,493 Interest Income 158, , , , ,062 Other 3,550,417 3,504,040 3,276,437 4,152,719 3,432,401 Total Revenues $ 60,346,778 $ 62,795,257 $ 60,733,168 $ 65,111,936 $ 54,797,775 Expenditures: Water Purchased $ 450,706 $ 458,843 $ 625,074 $ 671,788 $ 541,875 Sewage Disposal Contract 4,995,444 5,190,960 4,920,012 4,602,911 4,499,220 Water Treatment 7,602,809 7,745,815 7,526,468 7,867,893 7,812,074 Water Distribution 5,059,546 4,711,827 4,266,130 4,543,047 4,869,173 Water Other 9,181,049 9,153,031 8,897,251 9,117,298 8,606,668 Sewer Other 8,208,092 6,775,588 6,860,883 7,227,397 8,273,783 Total Expenditures $ 35,497,646 $ 34,036,064 $ 33,095,818 $ 34,030,334 $ 34,602,793 Net Revenue Available for Debt Service $ 24,849,132 $ 28,759,193 $ 27,637,350 $ 31,081,602 $ 20,194,982 Average Water Meters Serviced 44,868 44,370 43,297 43,083 42,750 FINANCIAL POLICIES Basis of Accounting...The accounts of the City are organized on the basis of funds, each of which constitutes a separate entity for accounting purposes. The most significant of these funds is the General Fund, which accounts for all revenues and expenditures of the City not accounted for in the various enterprise funds or the other funds maintained by the City. Other than ad valorem taxes, the primary sources of General Fund revenue include sales and use taxes, business and occupation fees, and miscellaneous sources, such as fines, penalties, licenses, fees, interest income from investments and other taxes. The enterprise funds consist of the Water Fund, the Wastewater Fund, the Solid Waste Fund, the Airport Fund, the Convention Services Fund, the Ranger Hall of Fame Fund, the Cameron Park Zoo Fund, the Transit Services Fund and the Cottonwood Creek Golf Course Fund (collectively, the Enterprise Funds ). The methods of accruing revenues and expenditures differ between the General Fund and Enterprise Funds. For a description of the accrual methods and the reporting entity definition, see APPENDIX B - EXCERPTS FROM THE CITY OF WACO,TEXAS ANNUALFINANCIAL REPORT -Note I. The City also provides government-wide financial statements prepared using the full accrual method of accounting pursuant to its adoption in 2002 of Governmental Accounting Standards Board Statement 34. The City utilizes the depreciation method of accounting for depreciable assets, including infrastructure. General Fund Balance...TheGeneralFundisthegovernment sprimaryoperatingfund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. The City s Financial Management Policy Statement for the General Fund has a goal for the unassigned General Fund balance to be at least 18% of current year budgeted revenues. The City s adopted budget for Fiscal Year 2015 lists General Fund expenditures of $110,929,866, compared with budgeted revenues of $110,929,866, resulting in the anticipated General Fund balance of approximately $49,178,343. Actual operations for Fiscal Year 2014 resulted in a fund balance of $51,797,659 at September 30, Of this amount, $21,043,396 (18.97% of FY 2015 budgeted revenues) is unassigned. Debt Service Fund Balance... The Debt Service Fund accounts for the servicing of general long-term debt not being financed by proprietary or nonexpendable trust funds. The City s adopted budget for Fiscal Year 2015 lists Debt Service Fund expenditures of 9,120,875 compared with budgeted revenues of $9,233,399, resulting in the anticipated Debt Service Fund balance of approximately $112,524. Actual operations for Fiscal Year 2014 resulted in a fund balance of $181,727 at September 30, Water Fund... The City s Financial Management Policy Statement for water has a goal to strive to maintain a positive retained earnings position to provide sufficient reserves for emergencies and revenue shortfalls. In addition, the minimum working capital shall be 30 percent of annual revenue. The working capital balance at September 30, 2014 was $27,572,699. Of this amount $3,511,264 was set aside for capital improvements, leaving an available working capital balance of $24,061,435 which was 61.8% of annual revenue. 34

35 Wastewater Fund... The City s Financial Management Policy Statement for wastewater has a goal to strive to maintain a positive retained earnings position to provide sufficient reserves for emergencies and revenue shortfalls. In addition, the minimum working capital shall be 30 percent of annual revenue. The working capital balance at September 30, 2014 was $15,826,454. Of this amount $897,436 was set aside for capital improvements, leaving an available working capital balance of $14,929,018 which was 69.7% of annual revenue. Solid Waste Fund... The City s Financial Management Policy Statement for solid waste has a goal to strive to maintain a positive retained earnings position to provide sufficient reserves for emergencies and revenue shortfalls. In addition, the minimum working capital shall be 30 percent of annual revenue. The working capital balance at September 30, 2014 was $15,466,979. Of this amount $2,249,583 was set aside for capital improvements, leaving an available working capital balance of $13,217,396 which was 78.2% of annual revenue. Budgetary Procedures...Budgetsareadopted on a basis consistent with generally accepted accounting principles. Annual appropriated budgets are adopted for the general fund, health fund and debt service funds (except for the street and drainage refundable contracts fund). All annual appropriations lapse at fiscal year-end. Also, project-length financial plans are adopted for all capital projects funds and the grant fund. Prior to August 1, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing the following October 1. The operating budget includes proposed expenditures and the means of financing them. A public hearing is conducted to obtain taxpayer comments. Prior to October 1, the budget is legally enacted through passage of an ordinance. Expenditures may not legally exceed appropriations at the fund level for each legally adopted annual operating budget. The City Manager may, without Council approval, transfer appropriation balances from one expenditure account to another within a department or agency of the City. The City Council, however, must approve any transfer of unencumbered appropriation balances or portions thereof from one department or agency to another. The reported budgetary data has been revised for amendments legally authorized during the year. Encumbrance accounting is employed in governmental funds. Encumbrances (e.g., purchase orders, contracts) outstanding at year-end do not constitute expenditures or liabilities because the commitments will be reappropriated and honored during the subsequent year. INVESTMENTS The City invests its investable funds in investments authorized by State law in accordance with investment policies approved by the City Council of the City. Both State law and the City s investment policies are subject to change. LEGAL INVESTMENTS Under State law, the City is authorized to invest in (1) obligations including letters of credit of the United States or its agencies and instrumentalities, (2) direct obligations of the State or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit (i) issued by a depository institution that has its main office or a branch office in the State, that are guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor, or are secured by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits, or (ii) where (a) the funds are invested by the City through a depository institution that has its main office or branch office in the State and that is selected by the City; (b) the depository institution selected by the City arranges for the deposit of funds in one or more federally insured depository institutions, wherever located; (c) the certificates of deposit are insured by the United States or an instrumentality of the United States; (d) the depository institution acts as a custodian for the City with respect to the certificates of deposit; and (e) at the same time that the certificates of deposit are issued, the depository institution selected by the City receives deposits from customers of other federally insured depository institutions, wherever located, that is equal to or greater than the funds invested by the City through the depository institution selected under clause (ii)(a) above, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1) above and are placed through a primary government securities dealer or a financial institution doing business in the State, (9) bankers acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a United States or state bank, (11) no-load money market mutual funds regulated by the Securities and Exchange Commission that have 35

36 a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invests exclusively in obligations described in the preceding clauses and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent; provided, however, that the City is not authorized to invest in the aggregate more than 15% of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in such no-load mutual funds, and (13) for bond proceeds, guaranteed investment contracts that have a defined termination date, are secured by obligations including letter of credit of the United States or its agencies and instrumentalities in an amount at least equal to the amount invested under the contract, and are pledged to the City and deposited with the City or with a third party selected and approved by the City; provided, however, that bond proceeds, excluding reserves and other funds held for debt service, are not invested in guaranteed investment contracts with a term of more than five years and are authorized as eligible investments by the City Council. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under the program are collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm not less than A or its equivalent, or (c) cash invested in obligations that are described in clauses (1) through (6) and (10) through (13) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body and held in the name of the governmental body; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State; and (iv) the agreement to lend securities has a term of one year or less. INVESTMENT POLICIES Under State law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted Investment Strategy Statement that specifically addresses each funds investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under State law, City investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. At least quarterly the investment officers of the City shall submit an investment report detailing: (1) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) State law. No person may invest City funds without express written authority from the City Council. ADDITIONAL PROVISIONS Under State law, the City is additionally required to: (1) annually review its adopted policies and strategies; (2) adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the City to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees; (4) require the qualified representative of firms offering to engage in an investment transaction with the City to: (a) receive and review the City s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions conducted between the City and the business organization that are not authorized by the City s investment policy (except to the extent that this authorization is 36

37 dependent on an analysis of the makeup of the City s entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement in a form acceptable to the City and the business organization attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the City s investment policy; (6) provide specific investment training for the Treasurer, chief financial officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse purchase agreement; (8) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the City s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, prohibit the investment in mutual funds of any portion of bond proceeds, reserves and funds held for debt service, and prohibit the investment of funds in either a money market or non-money market mutual fund in an amount that exceeds 10% of the total assets of such fund; (9) require local government investment pools to conform to advisory board requirements and the additional requirements set forth in Sections (b) and (c) of the Texas Government Code, as amended; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. THE CITY S INVESTMENT POLICY...The Director of Finance will promptly invest all City funds with the Bank Depository in accordance with the provisions of the current Bank Depository Agreement or in any negotiable instrument that the Council has authorized under the provisions of Chapter 2256, Texas Government Code, as amended, and in accordance with the City Council approved Investment Policies. TABLE 15 - CURRENT INVESTMENTS The City has contracted with First Southwest Asset Management to provide for investment and management of its public funds or other funds under its control. As of October 31, 2014, the City s investable funds were invested in the following categories: Percent Description of Total Market Value Book Value U.S. Agencies 19.29% $ 36,033,000 $ 36,003,134 Investment Pools (1) 2.99% 5,575,999 5,575,999 Collateralized Bank CDs 1.08% 2,019,597 2,019,597 Collateralized Savings Accounts (2) 76.64% 143,155, ,155,070 Total % $ 186,783,666 $ 186,753,800 (1) Includes TexPool and TexSTAR. (2) Backed by collateral that is held by third parties. TAX MATTERS TAX EXEMPTION In the opinion of Bracewell & Giuliani LLP, Bond Counsel, under existing law, (i) interest on the Obligations is excludable from gross income for federal income tax purposes and (ii) the Obligations are not private activity bonds under the Internal Revenue Code of 1986, as amended (the Code ) and, as such, interest on the Obligations is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. The Code imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Obligations, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of obligation proceeds and the source of repayment of obligations, limitations on the investment of obligation proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of obligation proceeds be paid periodically to the United States and a requirement that the issuer file an information report with the Internal Revenue Service (the Service ). The City has covenanted in the Ordinance that it will comply with these requirements. Bond Counsel s opinion will assume continuing compliance with the covenants of the Ordinances pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Obligations for federal income tax purposes and, in addition, will rely on representations by the City, the City s Financial Advisor and the Underwriter with respect to matters solely within the knowledge of the City, the City s Financial Advisor and the Underwriter, respectively, which Bond Counsel has not independently verified. If the City fails to comply with the covenants in the Ordinance or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Obligations could become includable in gross income from the date of delivery of the Obligations, regardless of the date on which the event causing such inclusion occurs. 37

38 The Code also imposes a 20% alternative minimum tax on the alternative minimum taxable income of a corporation if the amount of such alternative minimum tax is greater than the amount of the corporation s regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT or REMIC), includes 75% of the amount by which its adjusted current earnings exceeds its other alternative minimum taxable income. Because interest on taxexempt obligations, such as the Obligations, is included in a corporation s adjusted current earnings, ownership of the Obligations could subject a corporation to alternative minimum tax consequences. Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Obligations. Bond Counsel s opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel s knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel s attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel s opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsel s legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Obligations. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Obligations could adversely affect the value and liquidity of the Obligations during the pendency of the audit regardless of the ultimate outcome of the audit. ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS Collateral Tax Consequences...Prospective purchasers of the Obligations should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry taxexempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the branch profits tax on their effectively connected earnings and profits, including tax-exempt interest such as interest on the Obligations. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Certificates should also be aware that, under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Obligations, received or accrued during the year. Tax Accounting Treatment of Original Issue Premium...The issue price of a portion of the Obligations exceeds the stated redemption price payable at maturity of such Obligations. Such Obligations (the Premium Obligations ) are considered for federal income tax purposes to have bond premium equal to the amount of such excess. The basis of a Premium Obligation in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Obligation in determining gain or loss for federal income tax purposes. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Obligation by the initial owner. No corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Obligation that is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Obligation) is determined using the yield to maturity on the Premium Obligation based on the initial offering price of such Obligation. The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Obligations that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Obligations should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Obligation and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Obligations. Tax Accounting Treatment of Original Issue Discount Obligations...TheissuepriceofaportionoftheObligationsislessthan the stated redemption price payable at maturity of such Obligations (the Original Issue Discount Obligations ). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Obligation, and (ii) the initial offering price to the public of such Original Issue Discount Obligation constitutes original issue discount with respect to such Original Issue Discount Obligation in the hands of any owner who has purchased such Original Issue Discount Obligation in the initial public offering of the Obligations. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Obligations equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Obligation continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the 38

39 Obligations under the captions TAX MATTERS TAX EXEMPTION and ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS - COLLATERAL TAX CONSEQUENCES and - TAX LEGISLATIVE CHANGES generally applies, and should be considered in connection with the discussion in this portion of the Official Statement. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Obligation prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Obligation in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Obligation was held by such initial owner) is includable in gross income. The foregoing discussion assumes that (a) the Underwriters have purchased the Obligations for contemporaneous sale to the public and (b) all of the Original Issue Discount Obligations have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm's-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the inside cover page of this Official Statement. Neither the City nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Obligations will be offered and sold in accordance with such assumptions. Under existing law, the original issue discount on each Original Issue Discount Obligation is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Obligations and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Obligation for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Obligation. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Obligations which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Obligations should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Obligations and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Obligations. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Obligations which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Obligations should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Obligations and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Obligations. Tax Legislative Changes... Current law may change so as to directly or indirectly reduce or eliminate the benefit of the exclusion of interest on the Obligations from gross income for federal income tax purposes. Any proposed legislation, whether or not enacted, could also affect the value and liquidity of the Obligations. Prospective purchasers of the Obligations should consult with their own tax advisors with respect to any proposed, pending or future legislation. CONTINUING DISCLOSURE OF INFORMATION In the Ordinances, the City has made the following agreement for the benefit of the holders and beneficial owners of the Obligations. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified events, to the Municipal Securities Rulemaking Board (the MSRB ). ANNUAL REPORTS The City will provide certain updated financial information and operating data to the MSRB. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under Tables numbered 1 through 6 and 8 through 15 and in Appendix B. The City will update and provide this information within six months after the end of each fiscal year. The financial information and operating data to be provided may be set forth in full in one or more documents or may be included by specific reference to any document available to the public on the MSRB s Internet Web site ( or filed with the United States Securities and Exchange Commission (the SEC ), as permitted by SEC Rule 15c2-12 (the Rule ). The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If 39

40 audited financial statements are not available by the required time, the City will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the City may be required to employ from time to time pursuant to State law or regulation. The City s current fiscal year end is September 30. Accordingly, it must provide updated information by the last day of March in each year following the end of its fiscal year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change. EVENT NOTICES The City will also provide timely notices of certain events to the MSRB. The City will provide notice of any of the following events with respect to the Obligations to the MSRB in a timely manner (but not in excess of ten business days after the occurrence of the event): (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determination of taxability, Notices of Proposed Issue (IRS Form 5701TEB) or other material notices or determinations, with respect to the tax status of the Obligations or other material events affecting the tax status of the Obligations; (7) modifications to rights of holders of the Obligations, if material, and tender offers; (8) Obligation calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Obligations, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the City, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) the appointment of a successor or additional trustee or the change in the name of the trustee, if material. In addition, the City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under ANNUAL REPORTS. For the purposes of the event numbered 12 in the preceding paragraph, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. AVAILABILITY OF INFORMATION The City has agreed to provide the foregoing information only as described above. disclosure information filed with the MSRB free of charge at Investors will be able to access continuing LIMITATIONS AND AMENDMENTS The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Obligations at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Obligations may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Obligations in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Obligations consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Obligations. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Obligations in the primary offering of the Obligations. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under ANNUAL REPORTS an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. 40

41 COMPLIANCE WITH PRIOR UNDERTAKINGS On March 31, 2010, the City issued its General Obligation Refunding Bonds, Series 2010, refunding a portion of its outstanding certificates of obligation. The escrow agreement relating to the defeasance and redemption of the refunded certificates of obligation was filed on March 31, 2010 identifying the refunded certificates of obligation. The City filed a material events notice with respect to the defeasance and redemption of such certificates of obligation on November 10, OTHER INFORMATION RATINGS The presently outstanding tax supported debt of the City is rated Aa2 by Moody's and AA by S&P. The Obligations have been rated AA by S&P and Aa2 by Moody s. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Obligations. LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City, that, if decided against the City, would have a material adverse effect upon the operations of the City or that would exceed the contingency amounts set aside for such purpose. REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE The sale of the Obligations has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Obligations have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Obligations under the securities laws of any jurisdiction in which the Obligations may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Under the Texas Public Security Procedures Act, Chapter 1201, Texas Government Code, the Obligations (1) are negotiable instruments, (2) are investment securities to which Chapter 8 of the Texas Business and Commerce Code applies, and (3) are legal and authorized investments for (a) an insurance company, (b) a fiduciary or trustee, or (c) a sinking fund of a municipality or other political subdivision or public agency of the State. The Obligations are eligible to secure deposits of any public funds of the State, its agencies and political subdivisions, and are legal security for those deposits to the extent of their market value. For political subdivisions in the State which have adopted investment policies and guidelines in accordance with the Public Funds Investment Act, Chapter 2256, Texas Government Code, the Obligations may have to be assigned a rating of A or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with at least $1 million of capital and savings and loan associations. No review has been made of the laws in other states to determine whether the Obligations are legal investments for various institutions in those states. The City has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Obligations for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Obligations for such purposes. The City has made no review of laws in other states to determine whether the Obligations are legal investment for various institutions in those states. LEGAL MATTERS The City will furnish a complete transcript of proceedings incident to the authorization and issuance of the Obligations, including the approving legal opinions of the Attorney General of the State of Texas to the effect that the Obligations are valid and binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinions of Bond Counsel to a like effect and to the effect that the interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and the Obligations are not private activity bonds, see TAX MATTERS for a discussion of the opinions of Bond Counsel, including a description of the alternative minimum tax consequences for corporations. The forms of such opinions are attached hereto as Appendix C. Bond Counsel did not take part in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except 41

42 that, in its capacity as Bond Counsel, such firm has reviewed the information describing the Obligations and the Ordinance in this Official Statement under the captions PLAN OF FINANCING PURPOSE OF THE BONDS, PLAN OF FINANCING PURPOSE OF THE CERTIFICATES, THE OBLIGATIONS (except for the subcaptions TAX RATE LIMITATIONS BOOK-ENTRY-ONLY SYSTEM and OBLIGATIONHOLDERS REMEDIES ), TAX MATTERS, CONTINUING DISCLOSURE OF INFORMATION (except for the subcaption COMPLIANCE WITH PRIOR UNDERTAKINGS ) and the subcaptions LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS, REGISTRATION AND QUALIFICATIONS OF OBLIGATIONS FOR SALE and LEGAL MATTERS under the caption OTHER INFORMATION and is of the opinion that the information relating to the Obligations and the Ordinances contained therein fairly and accurately describes the provisions thereof. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of the Obligations are contingent on the sale and delivery of the Obligations. The legal opinions will accompany the Obligations deposited with DTC or will be printed on the Obligations in the event of the discontinuance of the Book-Entry-Only System. The legal opinions to be delivered concurrently with the delivery of the Obligations express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Obligations. The Financial Advisor's fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. First Southwest Company, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Obligations, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in the Official Statement in accordance with, and as part of, its responsibility to the City and, as applicable, the investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS Grant Thornton LLP, a firm of independent public accountants, will deliver to the City, on or before the settlement date of the Obligations, its verification report indicating that it has verified, in accordance with attestation standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the securities, to pay, when due, the maturing principal of, interest on and related call premium requirements of the Refunded Bonds and (b) the mathematical computations of yield used by Bracewell & Giuliani LLP to support its opinion that interest on the Obligations will be excluded from gross income for federal income tax purposes. The verification performed by Grant Thornton LLP will be solely based upon data, information and documents provided to Grant Thornton LLP by the City and its representatives. Grant Thornton LLP has restricted its procedures to recalculating the computations provided by the City and its representatives and has not evaluated or examined the assumptions or information used in the computations. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the City, at an underwriting discount of $259, The Underwriters are obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Underwriters. The Underwriters have agreed, subject to certain conditions, to purchase the Certificates from the City, at an underwriting discount of $47, The Underwriters are obligated to purchase all of the Certificates if any Certificates are purchased. The Certificates to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Certificates into investment trusts) at prices lower than the public offering prices of such Certificates, and such public offering prices may be changed, from time to time, by the Underwriters. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in acceptance with, and as a part of their responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. 42

43 The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the City for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City. Citigroup Global Markets Inc., an underwriter of the Bonds, has entered into a retail distribution agreement with each of TMC Bonds L.L.C. ( TMC ) and UBS Financial Services Inc. ( UBSFS ). Under these distribution agreements, Citigroup Global Markets Inc. may distribute municipal securities to retail investors through the financial advisor network of UBSFS and the electronic primary offering platform of TMC. As part of this arrangement, Citigroup Global Markets Inc. may compensate TMC (and TMC may compensate its electronic platform member firms) and UBSFS for their selling efforts with respect to the Bonds. FORWARD-LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from City records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Ordinances authorizing the issuance of the Obligations will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Obligations by the Underwriters. ATTEST: /s/ Malcolm Duncan, Jr. Mayor City of Waco, Texas /s/ Patricia Ervin City Secretary City of Waco, Texas 43

44 SCHEDULE I SCHEDULE OF REFUNDED OBLIGATIONS Combination Tax and Revenue Certificates of Obligation, Series 2006 Original Original Interest Dated Date Maturity Rates Amount Call Date 2/1/2006 2/1/ % $ 1,005,000 3/26/2015 2/1/ % 1,045,000 3/26/2015 2/1/ % 1,100,000 3/26/2015 2/1/ % 1,135,000 3/26/2015 2/1/ % 1,190,000 3/26/2015 2/1/ % 1,245,000 3/26/2015 2/1/ % 1,210,000 3/26/2015 2/1/ % 1,265,000 3/26/2015 2/1/ % 1,325,000 3/26/2015 2/1/ % 1,390,000 3/26/2015 2/1/ % 1,455,000 3/26/2015 2/1/ % 1,060,000 3/26/2015 2/1/ % 1,115,000 3/26/2015 **** **** **** **** 2/1/ % 1,980,000 3/26/2015 **** **** **** **** 2/1/ % 5,025,000 3/26/2015 **** **** **** **** 2/1/ % 2,895,000 3/26/2015 $ 25,440,000 Combination Tax and Revenue Certificates of Obligation, Series 2007 General Obligation Bonds, Series 2007 Original Original Interest Original Original Interest Dated Date Maturity Rates Amount Call Date Dated Date Maturity Rates Amount Call Date 2/21/2007 2/1/ % $ 2,330,000 2/1/2017 8/14/2007 2/1/ % $ 3,425,000 2/1/2017 2/1/ % 2,430,000 2/1/2017 2/1/ % 3,610,000 2/1/2017 2/1/ % 2,540,000 2/1/2017 2/1/ % 3,805,000 2/1/2017 2/1/ % 2,650,000 2/1/2017 2/1/ % 4,010,000 2/1/2017 2/1/ % 2,765,000 2/1/2017 2/1/ % 4,225,000 2/1/2017 **** **** **** **** **** **** **** **** 2/1/ % 5,905,000 2/1/2017 2/1/ % 14,095,000 2/1/2017 **** **** **** **** $ 33,170,000 2/1/ % 3,670,000 2/1/2017 $ 22,290,000

45 APPENDIX A GENERAL INFORMATION REGARDING THE CITY

46 GENERAL INFORMATION REGARDING THE CITY Information for this section has been obtained from various sources which are believed to be reliable, including the Greater Waco Chamber of Commerce, the Municipal Advisory Council of Texas, the Baylor Bureau of Business Research, the McLennan Community College Public Information Office, the Providence Health Center, the Hillcrest Baptist Medical Center, St. Catherine s Center, and the Waco McLennan County Medical Society. INTRODUCTION The City of Waco (the City ), founded in 1849, is the 22nd largest city in the State and covers approximately 99 square miles. The City is the county seat of McLennan County, which encompasses over 1,000 square miles. The City is the approximate geographic center of Texas population and is often referred to as the Heart of Texas. At the confluence of the Bosque River and the 890-mile Brazos River, the City lies between the three largest cities in the state: 90 miles south of Dallas, 200 miles northwest of Houston and 180 miles northeast of San Antonio. It is less than 100 miles from the state capitol in Austin. 80% of the State s population is within 300 miles of Waco. Historically, the City has been a trade and agriculture center. The central location in the State makes the City commercially attractive as a distribution center for trade goods of all kinds. Efforts by the community s leadership over the past several years have led to diversification in the regional economy. Attractive business opportunities exist in the Downtown Waco Public Improvement District, State and Federal Enterprise Zones, Foreign Trade Zone, Tax Increment Financing Zones and in the industrial parks operated by the Waco Industrial Foundation. Waco businesses are at the center of Texas and the hub of transportation and shipping facilities for distribution around the country and the world. Waco has many technical and professional employees who are graduates of the City s three institutions of higher learning - Baylor University, McLennan Community College and Texas State Technical College. These institutions also provide employers with customized training for workers, providing everything from literacy training to executive M.B.A. programs. TOP EMPLOYERS The City s economic diversity is reflected in the composition of the top employers in the City. These employers are: OVER 1,000 EMPLOYEES Baylor University - Education Waco Independent School District Education Providence Health Care Network - Medical, Hospital L3 Communications - Aircraft Modification Hillcrest Baptist Medical Center Medical, Hospital Wal-Mart Retail City of Waco - Government HEB Stores - Grocery Midway Independent School District Education Sanderson Farms Poultry Processing OVER 500 EMPLOYEES Examination Management Services Inc. Insurance Inspection Audit McLennan County Government McLennan Community College Post Secondary Education Veterans Administration Medical Center Veterans Healthcare System Cargill Foods, Inc. Dressed/ Packed Turkey Products Texas State Technical College Post Secondary Education Veterans Affairs Regional Office Allergan, Inc. United States Postal Service Federal Government Pilgrim s Pride, Inc. Poultry Processing American Income Life Army and Air Force Exchange Services Texas Youth Commission McLennan County SJCF Mars Chocolate A-1 OVER 300 EMPLOYEES Aramark Texas Farm Bureau and Affiliated Companies Family Health Center Coca-Cola North America Nurses Unlimited, Inc. Methodist Children's Home Lochridge Priest Connally ISD Alcoa Fastening Systems La Vega ISD Time Manufacturing Company Brazos Electric Packaging Corporation of America Scott & White Healthcare Big Creek Construction Heart of Texas Region MHMR Center Wal-Mart Return Center Spherion Owens Illinois Visiting Angels

47 ECONOMY The City is at the heart of a major growth area in the State economy. Texas is divided into six distinct economic regions, as described by the State Comptroller of Public Accounts. Situated in the northern portion of the Central Corridor, which stretches from south of the Dallas-Fort Worth Metroplex to south of San Antonio, Waco is in close proximity to four of Texas major cities. The City s sources of basic income are primarily from manufacturing, educational services and tourism, according to Baylor s Center for Economic Analysis. The educational sector contributes directly to the City s economic stability. The manufacturing and distribution sector of the City has grown steadily, especially in the transportation equipment and food processing industries. LABOR FORCE CITY OF WACO (1) Labor Total Year Force Employment Unemployment Rate ,683 51,872 2, % ,575 52,515 4, % ,467 52,928 4, % ,694 52,186 4, % ,722 52,612 4, % ,092 52,327 3, % ,947 52,866 3, % MCLENNAN COUNTY (1) Labor Total Year Force Employment Unemployment Rate , ,528 5, % , ,836 7, % , ,199 8, % , ,791 8, % , ,721 7, % , ,901 7, % , ,013 5, % (1) Source: Texas Workforce Commission. MEDIANHOUSEHOLD INCOME WACO MSA (1) (1) Source: U.S. Department of Housing and Urban Development. City State % of State Year Income Level Income Level Income Level 2009 $ 51,700 $ 57, % ,900 58, % ,000 59, % ,700 60, % ,000 60, % ,700 60, % A-2

48 EDUCATION The City s three institutions of higher learning, Baylor University, McLennan Community College and Texas State Technical College, provide a diversified and stable talent pool for local employers. Together, these institutions train more than 30,000 students in credit courses each year. Their combined full-time faculty numbers over 1,200. Together they offer the area a selection of over 300 different degree programs, ranging from one-year certificates of employment to a doctor of philosophy. TRANSPORTATION With its central location and easy proximity to other major Texas cities, the City continues to be a crossroads of major transportation systems. The City is at the center of a bustling region served by an impressive system of highways, railroads and air transportation. Highways Six highways intersect the City, creating easy access to Texas, the Southwest and the nation. Interstate 35 connects the City to Austin and San Antonio to the south and to Dallas-Fort Worth Metroplex to the north. US Highway 77 connects Waco to north and south Texas. US Highway 84 is a major thoroughfare connecting east and west Texas. US Highway 84 goes west through Abilene and Lubbock to the Panhandle; it also connects to Interstate 45, which runs from Dallas to Houston. State Highway 6 leads southeast from the City to the Houston area. State Highway 31 connects with Interstate 45 at Corsicana and continues on to Tyler and Shreveport, Louisiana. State Highway 164 also connects with Interstate 35 as well as State Highway 75. Rail The Union Pacific Railroad has two major lines providing service for local industry, running through the City and south of the City. The Union Pacific line connects to the Burlington Northern Santa Fe Railway. Motor Freight Transportation Air Motor freight needs of City industry are actively served by 20 common motor carriers. Of these carriers, all provide interstate service and six also provide Texas intrastate service. Three local airports, including one of the nation s largest industrial air facilities, offer beneficial services for businesses, industries and individuals. Waco Regional Airport, located on the northern boundaries of the City, is only 12 minutes from downtown Waco. American Eagle provides daily flights to Dallas/Fort Worth International Airport. Texas State Technical College Airport, located adjacent to the Texas State Technical College campus, is one of the nation s largest industrial airports and the City s largest airport, with a 8,600 by 200 foot all-weather runway, and an alternate 6,400 by 150-foot runway. To the west is the McGregor Airport, an executive airport facility. A-3

49 APPENDIX B EXCERPTS FROM THE CITY OF WACO, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2014 The information contained in this Appendix consists of excerpts from the City of Waco, Texas Annual Financial Report for the Year Ended September 30, 2014, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information.

50 City of Waco, Texas Financial Statements and Required Supplemental Information September 30, 2014 (With Independent Auditors Report Thereon)

51 City of Waco, Texas Table of Contents September 30, 2014 Table of Contents 1 Page Independent Auditors Report 2-4 Management s Discussion and Analysis 5-17 Basic Financial Statements Government-wide Financial Statements Statement of Net Position 18 Statement of Activities Fund Financial Statements Balance Sheet Governmental Funds 21 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds 22 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities 23 Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund Statement of Net Position Proprietary Funds Statement of Revenues, Expenses and Changes in Fund Net Position Proprietary Funds 35 Statement of Cash Flows Proprietary Funds Statement of Fiduciary Net Position Agency Funds 38 Notes to Financial Statements

52 INDEPENDENT AUDITOR S REPORT To the Honorable Mayor and Members of the City Council City of Waco, Texas Report on Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Waco, Texas, as of and for the year ended September 30, 2014, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 2

53 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Waco, Texas, as of September 30, 2014, and the respective changes in financial position and, where applicable, cash flows thereof and the respective budgetary comparison for the general fund for the year then ended in accordance with accounting principles generally accepted in the United States of America. Change in Accounting Principles As discussed in Note IV.S. to the financial statements, the City adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities, effective October 1, Our opinion is not modified with respect to these matters. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 5 through 17 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 17, 2015, on our consideration of the City of Waco, Texas internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on 3

54 compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City of Waco, Texas internal control over financial reporting and compliance. January 17,

55 Management s Discussion and Analysis As management of the City of Waco (the City), we offer readers of the City s financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, FINANCIAL HIGHLIGHTS The assets and deferred outflows of resources of the City exceeded its liabilities as of September 30, 2014 by $512,231,032 (net position). Of this amount, $99,856,522 (unrestricted net position) may be used to meet the City s ongoing obligations to citizens and creditors in accordance with the City s fund designation and fiscal policies. The City s total net assets increased by $6,946,371. As of the close of the current fiscal year, the City s governmental funds reported combined ending fund balances of $84,055,247. The fund balance components are nonspendable - $1,427,994, restricted - $30,300,675, committed - $12,507,957, assigned - $18,775,225 and unassigned - $21,043,396. The City Council approves the amounts reported as committed and assigned. As of September 30, 2014, unassigned fund balance for the General Fund was $21,043,396 or 18.97% of the 2015 budgeted general fund revenues. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to the City s basic financial statements. The City s basic financial statements are comprised of three components: (1) government-wide financial statements, (2) fund financial statements, and (3) notes to the financial statements. Government-wide financial statements The government-wide financial statements, which begin on page 18 of this report, are designed to provide readers with a broad overview of the City s finances, in a manner similar to a private-sector business. The Statement of Net Position presents information on all of the City s assets and liabilities, and deferred inflows/outflows of resources, with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. 5

56 The Statement of Activities presents information showing how the City s net position changed during the fiscal year. All changes in net position are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in the future fiscal periods (e.g., uncollected taxes and earned but unused compensated absences). Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include general government, public works, public safety, culture and recreation, public health, and housing and community development. The business-type activities of the City include water, wastewater, solid waste, airport, convention services, Ranger Hall of Fame, Cameron Park Zoo, transit services, and Cottonwood Creek Golf Course. The government-wide financial statements can be found on pages of this report. Fund financial statements A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All funds of the City can be divided into three categories governmental funds, proprietary funds, and fiduciary funds. Governmental funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statements of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. Beginning on page 21 of this report, information is presented separately in the Governmental Funds Balance Sheet and in the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances for the general fund, which is considered a major fund. A budgetary comparison statement has been provided for the general fund to demonstrate compliance. Data from all other governmental funds are combined into a single, aggregated presentation. 6

57 Proprietary funds The City maintains two types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for water, wastewater, solid waste, airport, convention services, Ranger Hall of Fame, Cameron Park Zoo, transit services, and Cottonwood Creek Golf Course operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City s various functions. The City uses its internal service funds to account for its risk management, health insurance, engineering, and fleet services. These internal service functions have been included within governmental activities in the government-wide financial statements. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The basic proprietary fund financial statements which begin on page 33 of this report provide separate information for the water, wastewater, and solid waste enterprise funds since these are considered to be major funds of the City. Data from the other enterprise funds are combined into a single, aggregated presentation. All internal service funds are combined into a single aggregated presentation in the proprietary fund financial statements. Fiduciary funds Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statement because the resource of these funds is not available to support the City s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The Statement of Fiduciary Net Position can be found on page 39 of this report. Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found on pages 39 through 81 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted earlier, net position may serve over time as a useful indicator of the government s financial position. In the case of the City of Waco, assets and deferred outflows of resources exceeded liabilities by $512,231,032 as of September 30, The largest portion of the City s net position ($392,204,795) reflects its net investment in capital assets (e.g., land, building, equipment, improvements, construction in progress, infrastructure and water rights), less any outstanding debt used to acquire those assets. The City uses these capital assets to provide service to citizens; consequently, these assets are not available for future spending. Although the City s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. 7

58 City of Waco Net Position Governmental Business-type Activities Activities Totals Current and other assets $ 109,033, ,012, ,997, ,057, ,030, ,070,262 Capital assets 257,050, ,717, ,618, ,759, ,668, ,476,089 Total assets 366,083, ,729, ,615, ,816, ,699, ,546,351 Total deferred outflows of resources 463, ,577 2,487,815 2,838,837 2,951,606 3,415,414 Long-term liabilities 101,508, ,693, ,816, ,752, ,325, ,445,754 Other liabilities 31,571,433 29,858,143 25,522,843 23,373,207 57,094,276 53,231,350 Total liabilities 133,080, ,551, ,339, ,125, ,419, ,677,104 Net position: Net investment in capital assets 180,508, ,902, ,696, ,231, ,204, ,133,730 Restricted 18,895,396 19,391,804 1,274,319 1,180,611 20,169,715 20,572,415 Unrestricted 34,063,949 28,460,006 65,792,573 60,118,510 99,856,522 88,578,516 Total net position $ 233,467, ,754, ,763, ,530, ,231, ,284,661 A portion of the City s net position ($20,169,715) represents resources that are subject to external restriction on how they may be used. The remaining balance ($99,856,522) of unrestricted net position may be used to meet the City s ongoing obligation to citizens and creditors in accordance with the City s fund designation and fiscal policies. As of September 30, 2014, the City has positive balances in all three categories of net position, both for the City as a whole, as well as for its governmental and business-type activities separately. The same situation held true for the prior fiscal year. The government s net position increased $6,946,371 during the current fiscal year. Analysis of the City s operations The following table provides a summary of the City s operations for the year ended September 30, Governmental activities increased the City s net position by $4,712,954 and represented 67.8% of the total. Business-type activities increased the City s net position by $2,233,417 and represented 32.2% of the total increase. 8

59 City of Waco Changes in Net Position Year Ended September 30, Governmental Business-type Governmental Business-type Activities Activities Total Activities Activities Total Revenues: Program revenues: Charges for services $ 8,274,277 86,092,057 94,366,334 6,298,141 88,204,469 94,502,610 Operating grants and contributions 10,924,393 3,869,760 14,794,153 11,500,355 3,419,959 14,920,314 Capital grants and contributions 3,272,066 1,682,452 4,954,518 7,256,153 4,836,705 12,092,858 General revenues: Ad valorem taxes 57,159,819-57,159,819 57,100,563-57,100,563 Sales taxes 33,487,659-33,487,659 31,075,760-31,075,760 Franchise taxes 14,181,593-14,181,593 13,405,186-13,405,186 Hotel/motel taxes - 2,403,171 2,403,171-2,095,987 2,095,987 Other taxes 785, , , ,254 Investment earnings 323, , , , , ,066 Miscellaneous 1,196,841-1,196,841 2,153,305-2,153,305 Gain on sale of land 105, , , ,376 Total revenues 129,711,591 94,244, ,956, ,064,696 98,716, ,781,279 Expenses: General government 16,223,167 16,223,167 20,039,649-20,039,649 Public works 12,205,449 12,205,449 13,699,976-13,699,976 Public safety 66,630,254-66,630,254 62,592,351-62,592,351 Culture and recreation 16,922,912-16,922,912 16,544,389-16,544,389 Public health 7,314,101-7,314,101 7,388,363-7,388,363 Housing and community development 2,974,293-2,974,293 2,255,720-2,255,720 Interest on long-term debt 3,631,452-3,631,452 3,798,174-3,798,174 Water - 32,998,874 32,998,874-33,038,145 33,038,145 Wastewater - 19,263,583 19,263,583-18,432,230 18,432,230 Solid waste - 15,794,559 15,794,559-16,033,246 16,033,246 Airport - 3,284,396 3,284,396-3,083,925 3,083,925 Convention services - 3,957,683 3,957,683-3,941,005 3,941,005 Ranger Hall of Fame - 1,326,695 1,326,695-1,343,575 1,343,575 Cameron Park Zoo - 4,494,173 4,494,173-4,318,267 4,318,267 Transit services - 8,177,708 8,177,708-8,046,015 8,046,015 Cottonwood Creek Golf Course - 1,810,707 1,810,707-1,782,963 1,782,963 Total expenses 125,901,628 91,108, ,010, ,318,622 90,019, ,337,993 Increase in net position before transfers 3,809,963 3,136,408 6,946,371 3,746,074 8,697,212 12,443,286 Transfers 902,991 (902,991) - 81,051 (81,051) - Increase in net position 4,712,954 2,233,417 6,946,371 3,827,125 8,616,161 12,443,286 Net position, beginning of year 228,754, ,530, ,284, ,017, ,544, ,562,247 Cumulative effect of change (881,234) (1,752,824) (2,634,058) in accounting principles Prior period adjustment ,101 1,122,085 1,913,186 Net position, beginning of year as restated 228,754, ,530, ,284, ,927, ,914, ,841,375 Net position, end of year $ 233,467, ,763, ,231, ,754, ,530, ,284,661 9

60 Governmental activities Key elements of the change in governmental net position include: Overall, governmental revenues decreased $353,105 (.27%). Ad valorem taxes reflected a slight increase of $59,256 (.10%), primarily as the result of 2.4% growth in property tax base which was offset by a reduction in the tax rate of one cent and decreased delinquent tax collections including penalties and interest. Sales taxes reflected an increase of $2,411,899 (7.77%). Charges for services increased $1,976,136 (31.38%) primarily due to increased court fine collections and a new contract to provide Air Rescue Firefighting (ARFF) at the Texas State Technical College (TSTC). These revenue increases were partially offset by the decrease in capital grants and contributions of $3,984,087 (54.91%) primarily due to the timing of streets and drainage infrastructure being accepted from developers for City maintenance. Overall, governmental expenses decreased $416,994 (.33%). A 2% percent salary increase as well as job class step increases for some civil service employees based on rank and service time was approved in the budget. This salary increase resulted in approximately $1.4 million of additional expense. Six new positions (estimated cost of $600,000) were added to the fire department for the new ARFF contract at TSTC airport. The City recognized an additional $1.2 million of depreciation expense as compared to the previous year. Over $800,000 of this increase was due to public safety functions, primarily for the renovated police headquarters, vehicles, and radios. These increases were offset by the reduction of $5 million in tax increment grant funding. During 2014, reinvestment zone number one expended $3 million (compared to $8 million during 2013) to assist with infrastructure improvements for the new stadium/community events complex at Baylor University. Additionally, 2013 was the first year of an approved tenyear commitment to provide grant funding of up to $35,060,340 for the complex. The eight remaining $3,006,034 annual payments are payable from tax increment revenue collected each year in which the payments are due. Texas Municipal Retirement System (TMRS) continues to make significant changes in actuarial assumptions and funding methodology used in calculating their member cities contribution rates. The TMRS benefit provisions were reviewed during the fiscal year 2012 budget process. The City Council approved a plan change to turn off annually repeating annuity increases for retirees. This plan change became effective January 1, 2012 and reduced the City s full contribution rate to 14.04% (as compared to an anticipated 2012 phase-in rate of 20.07% and full rate of 22.24%). The City's contribution rates for calendar years 2013 and 2014 were 13.87% and 13.61%, respectively. Business-type activities Key elements of the increase in business-type net position include: Total revenues decreased $4,471,797 (4.53%). Charges for services accounted for $2.1 million of this decrease because of reduced water revenue due to more rainfall as compared to the prior year. Capital grants and contributions decreased $3.2 million due to timing of construction projects at the Airport. Approximately $2.9 million of Airport construction commitments remained at year-end, primarily for the perimeter road project. 10

61 Total expenses increased by $1.1 million (1.21%). Increases in salaries and benefits accounted for $851,741. Master plans for both the water and wastewater systems are being completed with over $1 million expended for work done in the current year. These increases were offset with decreases in other expenses. Depreciation expense decreased $401,615 primarily due to reductions in Solid Waste for landfill improvements and equipment. Interest expense decreased $447,285 due to bond refunding issues and increased cash funding being utilized for capital projects. Government-wide activities Total government-wide activities for 2014 are depicted in the graphs below: Revenues by Source ( in $ millions) Ad valorem taxes Water service charges Sales tax Wastewater service charges Other fees and service charges Solid waste service charges Operating grants and contributions Franchise taxes Capital grants and contributions Other revenues $5.01 $4.95 $21.34 $17.56 $16.87 $14.79 $14.18 $33.49 $38.60 $57.16 $- $10 $20 $30 $40 $50 $60 Expenses by Activity (Percent of Total) Public safety 7% 6% 3% 2% 1% 31% Water Other enterprise expenses Wastewater 7% 8% Culture and recreation General government Solid waste Public Works Public health 9% 11% 15% Other governmental expenses Housing and community development 11

62 FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS Governmental funds - The focus of the City of Waco's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unassigned fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year. At the end of the current fiscal year, the City of Waco's governmental funds reported combined ending fund balances of $84,055,247. Approximately 1.7% ($1,427,994) of this total amount constitutes nonspendable fund balance. Nonspendable fund balance represents net resources that cannot be spent because of their form or because they must remain intact. Included in this component are inventories, advances to other funds, and permanent funds. Approximately 36.1% ($30,300,675) of the total fund balance is classified as restricted. Restricted fund balance reflects resources that are subject to externally enforceable legal restrictions. This classification includes debt service, capital projects, and special revenue funds such as tax increment zones. Approximately 14.9% ($12,507,957) of the fund balance is reported as committed. Committed fund balances represent resources whose use has a self-imposed limitation imposed by the City Council and would require formal action to remove or modify the commitment. This classification includes resources that have been committed for economic development initiatives. Approximately 22.3% ($18,775,225) of the fund balance is reported as assigned which reflects the City s intended use of resources. These intended uses are approved by the City Council. The remainder of the fund balance of $21,043,396 (25%) is reported as unassigned. Only the general fund can report a positive amount of unassigned fund balance. Refer to page 47 of this report for a more detailed presentation of governmental fund balances. The City s Financial Management Policy Statements provide for general fund unassigned fund balance to be maintained at 18% of current year revenues. Unassigned general fund balance at the end of the current fiscal year is 18.97% of 2015 budgeted revenues. The fund balance of the general fund at the end of the current year reported an increase of $5,328,406. Total revenues in the general fund increased $4,581,816 as compared to the prior year and were $5,609,027 more than budgeted. Key factors in general fund revenue are as follows: The total property tax rate decreased by one cent, but the distribution of the tax rate allocated to the General Fund increased. This was due to the Council's initiatives to increase cash funding for capital projects. Increases in property tax revenues resulting from growth in net taxable assessed property valuation of approximately $124 million, including $70 million from new construction, was partially offset by decreased delinquent tax collections. Property taxes represented over 39% of total general fund revenues. Sales tax revenue reported over a $2.4 million increase as compared to prior year, with actual amounts exceeding the amount originally budgeted for the fiscal year by $4 million. Increased economic activity, lower unemployment rates, and stable fuel prices all contributed to this revenue growth. This revenue source represents over 31% of total general fund revenues. 12

63 Gross receipts fees, which had been budgeted very conservatively, increased $710,949 as compared to prior year, but actual amounts exceeded the amount originally budgeted for the fiscal year by almost $1.4 million. Gross receipts from natural gas accounted for most of the $700,000 increase as a result of increases in consumption and prices. Over 13% of total general fund revenues came from gross receipts fees. Proprietary funds - The City's proprietary fund statements beginning on page 40 of this report provide the same type of information found in the government-wide financial statements, but in more detail. Unrestricted net position of the respective major proprietary funds are Water - $35,139,267, Wastewater - $19,205,697, and Solid Waste - $10,968,246. These funds experienced increases in total net position during 2014 as follows: Water - $2,802,209, Wastewater - $1,353,136, and Solid Waste - $766,431. General Fund budgetary highlights Differences between the original budget and the final amended budget for appropriations were $6,778,818. The primary differences can be briefly summarized as follows: $651,459 increase for purchasing ROW for the FM 1637, Highway 84, and Loop 574 projects. $9,500 increase for revision of the federal emergency management agency maps. $314,329 increase for funds allocated to the Texas Ranger Hall of Fame grounds and facilities projects. $449,166 increase for expenses related to streets maintenance. $489,067 increase for an Air Rescue Firefighting (ARFF) contract. $64,902 increase for information technology consulting services. $240,536 increase for information technology hardware and software upgrades. $123,000 increase for library land purchase. $584,373 increase for police department equipment. $425,320 increase for police department software upgrades. $428,425 increase for elevator modernization at the Police Headquarters. $271,296 increase for a portion of the lighting system replacement project for the historic Suspension Bridge. $234,461 for replacement of the City's telephone system. 13

64 $185,582 increase for the City's municipal information cable channel equipment. $100,996 increase for an Economic Development Strategic Plan $940,932 increase for waste disposal related to Peach Street property clean-up $476,810 increase to fund the Brazos Riverwalk project $50,000 increase to fund various large demolition projects. $76,458 increase for drainage projects. $308,359 increase for golf course equipment. $25,000 increase for housing department projects $100,000 increase for Greater Waco Collective Impact Initiative (Prosper Waco) contract. $48,347 increase for assistance with golf course operations. $80,500 increase to fund medical exams and testing for sexual assault victims. $100,000 increase for legal services in connection with the Brazos Riverfront Development project. Of this increase, $2,255,458 was from fund balance assigned for capital improvements, $600,000 from fund balance assigned for economic development, $470,084 from fund balance assigned for public works, $25,000 from fund balance assigned for housing and community development, $64,902 from fund balance assigned for other, $300,000 from fund balance restricted for public safety, $100,996 from increases in federal revenues, $489,067 from increases in contribution revenues, $268,941 from increases in gross receipts taxes, $80,500 from increases in miscellaneous revenues, $290,068 from increases in the transfer from the Abandoned Motor Vehicle fund, and $1,833,482 from increases in sales tax. Refer to the General Fund Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual on pages 24 to 32 of this report for a detailed presentation of the actual General Fund operations compared to both the original and final budget for fiscal year CAPITAL ASSETS The City of Waco's investment in capital assets for its governmental and business-type activities as of September 30, 2014, amounts to $666,668,170 (net of accumulated depreciation). This investment in capital assets includes land, building, machinery and equipment, improvements other than buildings, infrastructure and construction work in progress. Major capital asset events occurring during the current fiscal year included the following: Capitalized approximately $11.5 million on various water, wastewater, and solid waste systems projects. 14

65 Capitalized $3.0 million on various park facility improvements expenditures. Capitalized $1.5 million on Airport Improvement Program projects. Capitalized $1.9 million for police facilities and equipment. Capitalized $5.9 million in street and drainage expenditures and contributions. Capitalized $1.1 million for fire station. City of Waco Capital Assets Governmental Business-type Activities Activities Totals Land $ 45,659,048 44,816,272 6,522,237 6,311,458 52,181,285 51,127,730 Buildings 69,353,478 68,049,191 81,092,966 81,092, ,446, ,142,157 Improvements other than buildings 59,345,775 56,635, ,730, ,156, ,076, ,791,127 Machinery and equipment 49,865,359 44,404,968 45,854,225 44,813,771 95,719,584 89,218,739 Museum collections - - 2,160,924 2,133,424 2,160,924 2,133,424 Infrastructure 264,356, ,147, ,356, ,147,197 Construction work in progress 4,341,139 5,679,635 14,411,036 9,889,387 18,752,175 15,569,022 Water rights ,482,879 32,482,879 32,482,879 32,482,879 Less: accumulated depreciation (235,871,758) (221,015,272) (251,636,542) (230,120,914) (487,508,300) (451,136,186) Total capital assets $ 257,050, ,717, ,618, ,759, ,668, ,476,089 Additional information on the City's capital assets can be found in Note IV on pages of this report. DEBT ADMINISTRATION At the end of the current fiscal year, the City of Waco had total bonded debt, loans and notes payable, and capital lease obligations of $313,467,439. Of this amount, $311,556,559 represents bonded debt backed by the full faith and credit of the government. The City s capitalized lease obligation of $12,443 pertains to purchases of computer equipment. The $1,898,437 note payable is for purchase of pump station and water transmission lines. 15

66 City of Waco Bonds, Notes and Capitalized Obligations Payable Governmental Business-type Activities Activities Totals General obligation certificates $ 88,539,551 82,438, ,017, ,080, ,556, ,518,889 Capital lease obligations 12,443 61, ,443 61,608 Note payable - - 1,898,437 1,967,906 1,898,437 1,967,906 $ 88,551,994 82,499, ,915, ,048, ,467, ,548,403 During the 2014 fiscal year, the City issued $9,650,000 in general obligation certificates of obligation. The proceeds will be used for various general City improvements including traffic control systems, streets, street lighting and drainage, sidewalks, vehicles, equipment, water, and wastewater improvements. The City's combination tax and revenue certificates of obligation bond ratings are listed below: Moody's Investors Service Standard and Poor's General obligation bonds Aa2 AA Additional information on the City of Waco's long-term debt can be found in Note IV on pages 62 to 67 of this report. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The general fund budget (including transfers in) for fiscal year 2015 is based on an increase in revenues of 7.3% over last year s adopted budget, due mainly to the increase from ad valorem taxes primarily from new construction and the City s debt reduction initiative, and significant increases in sales tax and court fines. No ad valorem tax rate adjustment is included for Approximately 29% of general fund revenues come from sales taxes. The City ended 2014 with sales tax revenue considerably over the original adopted budget. Sales taxes for 2015 were budgeted with an 8% increase over the fiscal year 2014 adopted budget, but still less than actual receipts for The City s preference is to be conservative in this area of the budget because this revenue is so volatile and is affected by so many factors that the City has no control over. The 2015 budget includes a 2% salary increase for all employees and increases for certain civil service employees who are eligible for step pay increases. Departments were asked to evaluate their staffing needs as positions became vacant during the year, review positions that had been vacant for a considerable amount of time, and assess operations for efficiencies in the workforce. This budget reflects a net increase of 13.5 full-time equivalent positions over last year s budget primarily for additional police dispatchers and fire personnel. 16

67 The TMRS benefit provisions of the City s plan were reviewed during the fiscal year 2012 budget process and as a result, the City Council approved a plan change to turn off annually repeating annuity increases and significantly reduced pension expense. Effective January 1, 2015, the City s full contribution rate is 13.15%. The City s budget for fiscal year 2015 included approximately $10 million for TMRS contributions and the City s funded ratio decreased slightly to 85% due primarily to the change from the Projected Unit Credit actuarial funding method to Entry Age Normal that was adopted by TMRS. Fiscal year 2015 does not include any rate changes in water and wastewater rates for any class of customers. Solid waste residential, commercial, roll-off and landfill rates will also remain the same for The landfill charge for non-citizens and self-hauling entities was increased. REQUEST FOR INFORMATION The financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the City's finances. If you have questions about this report or need any additional information, contact Janice Andrews, Finance Director, at P. O. Box 2570, Waco, Texas , or call (254)

68 City of Waco, Texas Statement of Net Position September 30, 2014 Primary Government Component Units Waco Health Baylor Waco Central Waco Facilities Governmental Business-type Stadum Development Development Activities Activities Total Authority Corporation Corporation Assets Cash and investments $ 89,912,756 70,068, ,980, ,923 6,261 30,174 Receivables (net of allowances for uncollectibles): Accounts 3,923,587 10,922,371 14,845,958 88, Special assessments 11,315-11, Taxes 8,257,619-8,257, Intergovernmental receivable 2,545,187 1,179,068 3,724, Accrued interest receivable - 3,356 3, Internal balances 831,301 (831,301) Inventories 1,008,432 1,179,405 2,187,837 12, Restricted cash and investments - 30,924,752 30,924, Notes receivable 2,497, ,475 3,048, Real estate held for resale 46,221-46, Deferred charges Capital assets not being depreciated: Land 45,659,048 6,522,237 52,181, Museum collections - 2,160,924 2,160, Construction in progress 4,341,139 14,411,036 18,752, Capital assets, net of accumulated depreciation: Buildings 51,526,705 48,784, ,311, Machinery and equipment 16,760,823 13,791,195 30,552, Improvements other than buildings 33,397, ,301, ,698, Infrastructure 105,365, ,365, Water rights - 23,646,352 23,646, Total assets 366,083, ,615, ,699, ,388 6,336 30,174 Deferred Outflows of Resources Deferred outflows of resources: Deferred losses on refundings of debt 463,791 2,487,815 2,951, Total deferred outflows of resources 463,791 2,487,815 2,951, Liabilities Accounts payable 5,222,530 2,756,556 7,979, , Accrued liabilities 5,413,170 2,476,913 7,890,083 33, Accrued interest payable 640,699 1,568,893 2,209, Unearned revenue 41,839 96, , Escrow funds 249, , Customer deposits 274, , Liabilities payable from restricted assets - 4,361,336 4,361, Noncurrent liabilities: Due within one year 19,728,707 14,263,115 33,991, Due in more than one year 101,508, ,816, ,325, Total liabilities 133,080, ,339, ,419, , Net Position Net investment in capital assets 180,508, ,696, ,204, Restricted for: Tax increment financing/public improvement district 11,667,535-11,667, Housing and community development 2,333,652-2,333, Culture and recreation 2,221,307-2,221, Public safety 1,490,130-1,490, Municipal information 703, , Parks and cemetery care - nonexpendable 478, , Capital projects - 1,274,319 1,274, Unrestricted 34,063,949 65,792,573 99,856,522-6,336 30,174 Total net position $ 233,467, ,763, ,231,032-6,336 30,174 See accompanying notes to financial statements. 18

69 City of Waco, Texas Statement of Activities Year Ended September 30, 2014 Program Revenues Operating Charges for Grants and Functions/Programs Expenses Services Contributions Primary Government: Governmental activities: General government $ (16,223,167) 192,402 1,902,154 Public works (12,205,449) 2,257 - Public safety (66,630,254) 5,520,650 1,485,836 Culture and recreation (16,922,912) 1,404,877 1,308,627 Public health (7,314,101) 1,154,091 3,648,017 Housing and community development (2,974,293) - 2,579,759 Interest on long-term debt (3,631,452) - - Total governmental activities (125,901,628) 8,274,277 10,924,393 Business-type activities: Water (32,998,874) 38,600,073 - Wastewater (19,263,583) 21,343,556 - Solid waste (15,794,559) 16,866,587 - Airport (3,284,396) 1,142,240 87,600 Convention services (3,957,683) 1,213,798 - Ranger Hall of Fame (1,326,695) 420, ,707 Cameron Park Zoo (4,494,173) 1,582,279 - Transit services (8,177,708) 3,373,782 3,652,453 Cottonwood Creek Golf Course (1,810,707) 1,549,328 - Total business-type activities (91,108,378) 86,092,057 3,869,760 Total primary government $ (217,010,006) 94,366,334 14,794,153 Component Units: Baylor Waco Stadium Authority $ (523,163) 56, ,407 Central Waco Development Corporation (65) - - Waco Health Facilities Development Corporation (75) - - Total component units $ (523,303) 56, ,407 See accompanying notes to financial statements. General revenues: Taxes: Property Property tax increment financing Sales Franchise Hotel/motel Other Unrestricted investment earnings Gain on sale of capital assets Miscellaneous Transfers Total general revenues and transfers Change in net position Net position, beginning of year, as restated Net position, end of year 19

70 Net Revenues (Expenses) and Changes in Net Position Primary Government Component Units Waco Health Capital Baylor Waco Central Waco Facilities Grants and Governmental Business-type Stadium Development Development Contributions Activities Activities Total Authority Corporation Corporation - (14,128,611) - (14,128,611) 2,713,975 (9,489,217) - (9,489,217) - (59,623,768) - (59,623,768) 558,091 (13,651,317) - (13,651,317) - (2,511,993) - (2,511,993) - (394,534) - (394,534) - (3,631,452) - (3,631,452) 3,272,066 (103,430,892) - (103,430,892) 199,608-5,800,807 5,800, ,079,973 2,079, ,072,028 1,072,028 1,455,344 - (599,212) (599,212) - - (2,743,885) (2,743,885) 27,500 - (749,074) (749,074) - - (2,911,894) (2,911,894) - - (1,151,473) (1,151,473) - - (261,379) (261,379) 1,682, , ,891 4,954,518 (103,430,892) 535,891 (102,895,001) (65) (75) - - (65) (75) $ 51,585,835-51,585, ,573,984-5,573, ,487,659-33,487, ,181,593-14,181, ,403,171 2,403, , , , , , , , ,196,841-1,196, ,991 (902,991) ,143,846 1,697, ,841, ,712,954 2,233,417 6,946,371 - (48) 2 228,754, ,530, ,284,661-6,384 30,172 $ 233,467, ,763, ,231,032-6,336 30,174 20

71 City of Waco, Texas Balance Sheet Governmental Funds September 30, 2014 Other Total Governmental Governmental General Funds Funds Assets Assets: Cash and investments $ 48,314,509 31,148,891 79,463,400 Receivables, net of allowances: Accounts 3,830,936 83,603 3,914,539 Special assessments - 11,315 11,315 Taxes 7,730, ,892 8,257,619 Notes receivable - 2,497,322 2,497,322 Due from other funds 1,155,082 5,960,522 7,115,604 Advances to other funds - 168, ,368 Intergovernmental receivable 1,042,335 1,502,852 2,545,187 Inventories 734, ,557 Real estate held for resale 6,160 40,061 46,221 Total assets $ 62,814,306 41,939, ,754,132 Liabilities Liabilities: Accounts payable $ 3,049,944 1,807,570 4,857,514 Accrued liabilities 3,644,319 1,286,347 4,930,666 Unearned revenue 28,645 13,194 41,839 Due to other funds 674,191 6,030,453 6,704,644 Deposits 274, ,839 Escrow funds 221,555 27, ,111 Total liabilities 7,893,493 9,165,120 17,058,613 Deferred Inflows of Resources Deferred inflows of resources: Unavailable revenue: Property taxes 1,588, ,803 2,093,951 Court fines 612, ,785 Other 922,221 11, ,536 Total deferred inflows of resources 3,123, ,118 3,640,272 Fund Balances Fund balances: Nonspendable 740, ,277 1,427,994 Restricted 1,706,157 28,594,518 30,300,675 Committed 9,532,164 2,975,793 12,507,957 Assigned 18,775,225-18,775,225 Unassigned 21,043,396-21,043,396 Total fund balances 51,797,659 32,257,588 84,055,247 Total liabilities, deferred inflows of resources, and fund balances $ 62,814,306 41,939,826 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 256,102,125 Other long-term assets are not available to pay for current-period expenditures and, therefore, deferred in the funds. 3,640,272 Internal service funds are used by management to charge the costs of certain services to individual funds. The assets and liabilities of the internal service funds are included in the governmental activities in the statement of net position. 7,200,280 Long-term liabilities are not due and payable in the current period and, therefore, are not reported in the funds. (117,530,483) See accompanying notes to financial statements. $ 233,467,441 21

72 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds Year Ended September 30, 2014 Other Total Governmental Governmental General Funds Funds Revenues: Taxes $ 75,866,868 14,812,868 90,679,736 Business and occupation fees 14,181,593-14,181,593 Permits, licenses and fees 1,348,415 1,170,604 2,519,019 Fines 2,416, ,544 2,555,149 Charges for services 1,639,054-1,639,054 Investment earnings 145, , ,370 Contributions 883, ,815 Intergovernmental 1,682,910 8,595,783 10,278,693 Program income - 338, ,265 Other 9,256, ,376 10,028,613 Total revenues 107,420,832 25,979, ,400,307 Expenditures: Current: General government 17,230,269 7,707,355 24,937,624 Public works 2,583,490-2,583,490 Public safety 60,162,734 2,359,044 62,521,778 Culture and recreation 12,926,462 1,072,167 13,998,629 Housing and community development 192,147 2,967,944 3,160,091 Public health - 7,267,366 7,267,366 Capital outlay - 10,002,288 10,002,288 Debt service: Principal - 5,340,143 5,340,143 Interest and fiscal charges - 3,788,820 3,788,820 Bond issuance costs - 26,107 26,107 Total expenditures 93,095,102 40,531, ,626,336 Excess (deficiency) of revenues over (under) expenditures 14,325,730 (14,551,759) (226,029) Other financing sources (uses): Proceeds from sale of capital assets 105, ,278 General obligation bonds issued - 1,645,000 1,645,000 Premium on general obligation bonds - 59,040 59,040 Transfers in 4,683,880 12,820,951 17,504,831 Transfers out (13,786,482) (2,634,098) (16,420,580) Total other financing sources (uses) (8,997,324) 11,890,893 2,893,569 Net change in fund balances 5,328,406 (2,660,866) 2,667,540 Fund balances, beginning of year, as restated 46,469,253 34,918,454 81,387,707 Fund balances, end of year $ 51,797,659 32,257,588 84,055,247 See accompanying notes to financial statements. 22

73 City of Waco, Texas Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities Year Ended September 30, 2014 Amounts reported for governmental activities in the Statement of Activities (pages 19-20) are different because: Net change in fund balances - total governmental funds (page 22) $ 2,667,540 Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. 170,481 The net effect of various miscellaneous transactions involving capital assets (i.e., sales, transfers, trade-ins, and donations) is to increase net assets. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 6,657,963 (599,818) The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of longterm debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of premiums, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. 3,636,693 Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. (1,015,880) Internal service funds are used by management to charge the costs of certain services to individual funds. The net revenue of activities of internal service funds is reported with governmental activities. (935,425) Change in net position of governmental activities (pages 19-20) $ 10,581,554 See accompanying notes to financial statements. 23

74 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Revenues Taxes: Sales tax income $ 29,478,117 31,311,599 33,487,659 2,176,060 31,075,760 Property taxes 41,674,710 41,674,710 41,914, ,988 41,286,874 Interest and penalty on taxes 450, , ,511 14, ,311 Total taxes 71,602,827 73,436,309 75,866,868 2,430,559 72,988,945 Business and occupation fees: Occupation fees 100, , , ,233 Gross receipts fees 12,684,942 12,953,883 14,080,902 1,127,019 13,369,953 Total business and occupation fees 12,784,942 13,053,883 14,181,593 1,127,710 13,405,186 Permits, licenses and fees: Building permits 400, , , , ,029 Plumbing permits 120, , ,581 91, ,203 Electrical permits 170, , , , ,139 Heating and air conditioning licenses 65,000 65, ,956 45,956 78,540 Fire inspection fees 30,109 30,109 46,772 16,663 36,731 House moving permits Open air/street vending 3,153 3,153 5,230 2,077 5,240 Sign permits 4,500 4,500 31,425 26,925 27,117 Subdivision fees 20,000 20,000 38,508 18,508 31,601 Total permits, licenses and fees 812, ,762 1,348, ,653 1,170,932 Fines: Court fines 1,593,034 1,593,034 2,241, ,102 1,762,756 Auto impound fees 80,000 80, ,469 95,469 44,550 Total fines 1,673,034 1,673,034 2,416, ,571 1,807,306 Charges for services: Recreation 772, , ,614 9, ,814 Weed mowing 35,000 35,000 73,376 38,376 65,427 Library fees 99,185 99, ,351 19, ,406 Animal pick up 17,117 17,117 12,740 (4,377) 12,755 Animal shelter fees 190, , ,854 (10,946) 154,272 Grounds maintenance 51,540 51,540 51,540-50,039 Graphics 75,000 75,000 68,420 (6,580) 95,029 Police security services 152, ,540 33,014 (119,526) 130,500 Airport security services 308, , ,145 10, ,619 Total charges for services 1,702,242 1,702,242 1,639,054 (63,188) 1,643,861 Investment earnings 72,000 72, ,363 73, ,101 Contributions 153, , , , ,918 Intergovernmental 1,504,640 1,605,636 1,682,910 77,274 1,568,064 (continued) 24

75 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Revenues (continued) Other: Indirect expense reimbursements $ 6,899,797 6,899,797 6,848,631 (51,166) 6,760,825 False alarm fines 8,063 8,063 10,200 2,137 8,550 Rents from real estate 126, , ,061 26, ,013 Miscellaneous revenue 1,112,093 1,192,593 1,490, ,654 2,214,711 Sale of other scrap 11,974 11,974 12, ,928 Zoning applications 10,000 10,000 15,490 5,490 13,375 Commission from sale of mixed drinks 360, , , , ,202 Commission on municipal court fines 65,066 65, ,341 38,275 79,790 Commission on concessions 112, , ,469 8, ,272 Garage sale permits 26,634 26,634 24,410 (2,224) 25,500 Special assessments - - 2,257 2,257 1,537 Total other 8,732,701 8,813,201 9,256, ,036 9,754,703 Total revenues 99,038, ,811, ,420,832 5,609, ,839,016 Expenditures General Government Administrative services: Salaries and wages 1,427,764 1,427,764 1,379,213 48,551 1,291,000 Employee benefits 423, , ,762 19, ,915 Purchased professional/technical services 52, , ,716 17,494 47,135 Purchased property services 31,562 31,562 34,100 (2,538) 34,528 Maintenance 2,000 2,000-2,000 - Other purchased service 296, ,357 93, ,237 74,991 Supplies 93,577 93,577 88,500 5,077 83,177 Other expenses 305, , , , ,971 Total administrative services 2,632,946 3,131,271 2,361, ,821 2,196,717 City Secretary: Salaries and wages 273, , ,512 (667) 258,004 Employee benefits 99,084 99,084 97,069 2,015 92,069 Purchased professional/technical services 54,542 31,597 22,265 9,332 37,814 Maintenance 11,513 11,013 3,230 7,783 2,974 Other purchased services 17,155 23,000 25,010 (2,010) 17,895 Supplies 18,935 21,535 18,725 2,810 19,238 Capital expenditures - 15,000 11,851 3,149 - Total city secretary 475, , ,662 22, ,994 Finance services: Salaries and wages 950, , ,929 55, ,009 Employee benefits 305, , ,924 17, ,506 Purchased professional/technical services 80,503 80,503 77,480 3,023 64,573 Maintenance Other purchased service 26,389 26,389 19,881 6,508 18,878 Supplies 29,603 29,603 25,420 4,183 24,031 Other expenses 5,457 5,457 6,287 (830) 4,933 Total finance services 1,398,790 1,398,790 1,311,921 86,869 1,285,930 (Continued) 25

76 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) General Government (continued) Legal services: Salaries and wages $ 915, , ,240 65, ,108 Employee benefits 270, , ,993 18, ,300 Purchased professional/technical services 28,685 5,136 1,907 3,229 6,438 Maintenance Other purchased service 32,878 29,265 27,181 2,084 22,653 Supplies 33,046 35,910 30,525 5,385 25,573 Total legal services 1,281,248 1,191,213 1,096,846 94,367 1,158,296 Planning services: Salaries and wages 354, , ,874 2, ,613 Employee benefits 125, , ,710 8, ,576 Purchased professional/technical services - 15,685 8,874 6, Purchased property services 65,976 65,976 66,037 (61) 66,561 Maintenance 1,110 1,610 1, ,597 Other purchased service 17,291 20,766 13,818 6,948 10,302 Supplies 20,788 33,888 32,539 1,349 22,973 Total planning services 585, , ,106 26, ,992 Human resources: Salaries and wages 501, , ,127 (10,999) 475,920 Employee benefits 165, , ,473 (2,787) 156,996 Purchased professional/technical services 12,433 12,433 6,019 6,414 2,836 Maintenance 2,080 2,080 1, ,544 Other purchased service 45,892 45,480 21,870 23,610 30,993 Supplies 11,692 12,104 11, ,322 Total human resources 738, , ,798 17, ,611 Municipal information: Salaries and wages 434, , , ,533 Employee benefits 154, , ,882 1, ,710 Purchased professional/technical services 10,815 16,873 32,805 (15,932) 16,444 Maintenance 8,499 14,788 14, ,386 Other purchased service 21,756 21,756 21, ,588 Supplies 24,785 41,685 44,414 (2,729) 61,259 Other expenses 32,040 32,040 27,233 4,807 32,034 Capital expenditures - 156,335 96,813 59,522 78,024 Total municipal information 687, , ,442 48, ,978 Information technology services: Salaries and wages 951, , ,450 25, ,178 Employee benefits 313, , ,415 11, ,318 Purchased professional/technical services 83, , ,546 (65,842) 158,457 Maintenance 507, , ,296 66, ,231 Other purchased service 434, , ,757 9, ,346 Supplies 74, , ,523 (203,609) 248,852 Capital expenditures 49, , ,302 (89,802) 121,416 Total information technology services 2,416,305 2,721,743 2,969,289 (247,546) 2,416,798 (Continued) 26

77 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) General Government (continued) Purchasing services: Salaries and wages $ 298, , ,322 (5,587) 328,843 Employee benefits 104, , ,646 1, ,758 Purchased professional/technical services Maintenance (203) 57 Other purchased service 14,507 13,486 11,655 1,831 11,246 Supplies 9,889 10,910 10, ,247 Total purchasing services 428, , ,332 (1,699) 457,303 Facilities: Salaries and wages 979, ,946 1,040,574 (60,628) 994,103 Employee benefits 457, , ,422 (23,608) 448,847 Purchased professional/technical services 170, , ,682 (83,212) 230,782 Purchased property services 11,145 11,145 5,603 5,542 10,476 Maintenance 1,506, ,322 1,051,333 (160,011) 976,412 Other purchased service 62,974 62,974 89,089 (26,115) 46,143 Supplies 219, , ,169 (64,192) 262,427 Capital expenditures - 428, , ,837 4,880 Total facilities 3,409,014 3,282,073 3,524,460 (242,387) 2,974,070 Economic development: Purchased professional/technical services ,700 (16,700) 3,850 Total economic development ,700 (16,700) 3,850 Economic development incentive: Purchased professional/technical services - 1,250, , , ,600 Total economic development incentive - 1,250, , , ,600 Contributions: McLennan County 138, , ,395 12, ,048 Greenwood Cemetery 1,500 1,500 1,500-1,500 Rosemound Cemetery 40,000 40,000 40,000-40,000 H.O.T. Council of Governments 11,344 11,344 9,842 1,502 9,842 The Advocacy Center 83,314 83,314 83,314-75,740 Greater Waco Chamber 136, , ,054 6, ,500 Central Texas African American Chamber 68,000 68,000 68,000-68,000 Cen-Tex Hispanic Chamber 68,000 68,000 68,000-68,000 Downtown River Corridor 200, , ,144 19, ,286 Economic development grants 465, , , , ,299 NAFTA Impact Zone 2 25,000 25,000 (25,000) 50, ,000 McLennan County Appraisal District 619, , ,438 28, ,246 YMCA Multi-Purpose Center 55,000 55,000 52,558 2,442 55,006 Senior Ministries 28,000 28,000 28,000-28,000 Greater Waco Impact Initiative - 100,000 59,800 40,200 - Arts-Historic Agencies 150, , ,000 8,000 - Total contributions 2,089,474 2,189,474 1,818, ,326 1,923,467 Miscellaneous: Employee benefits 80,000 80,000 45,240 34,760 65,684 Purchase professional/technical services 170, , ,467 20, ,355 Maintenance 3,000 3,000 4,984 (1,984) 5,917 Other purchased service (22) Supplies - - 6,586 (6,586) 4,766 Capital expenditures 100, , ,112 (5,651) 682,265 Other expenses 693, , , , ,596 Total miscellaneous 1,046,643 1,181, , ,364 1,197,561 (Continued) 27

78 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) General Government (continued) Total General Government $ 17,189,632 19,536,497 17,230,269 2,306,228 16,189,167 Public Works Streets and drainage services: Salaries and wages 465, , , , ,987 Employee benefits 298, , ,787 34, ,565 Purchased professional/technical services 7,500 22,200 24,091 (1,891) 7,910 Purchased property services 31,756 31,756 36,117 (4,361) 30,446 Maintenance 600, , ,430 1, ,672 Other purchased service 115, ,516 81,971 33,545 63,896 Supplies 296, , ,436 55, ,769 Other expenses (149,880) 501, ,116 (38,537) 1,010,680 Capital expenditures 526, , ,295 9, ,929 Total streets and drainage services 2,191,970 2,775,153 2,583, ,663 3,214,854 Total Public Works 2,191,970 2,775,153 2,583, ,663 3,214,854 Public Safety Municipal court: Salaries and wages 793, , ,533 34, ,404 Employee benefits 268, , ,481 9, ,713 Purchased professional/technical services 19,900 19,900 13,613 6,287 13,459 Maintenance 1,400 1, Other purchased service 29,664 29,664 23,103 6,561 18,310 Supplies 88,889 88,889 88, ,588 Capital expenditures - - 6,521 (6,521) - Other expenses 8,915 8,915 13,995 (5,080) 9,682 Total municipal court 1,210,222 1,210,222 1,163,250 46, ,264 Inspection services: Salaries and wages 899, , ,345 19, ,722 Employee benefits 348, , ,320 11, ,332 Purchased professional/technical services 190, , ,887 23, ,379 Purchased property services 66,936 66,936 66, ,214 Maintenance 48,888 48,888 47,176 1,712 46,226 Other purchased service 63,455 63,455 63,798 (343) 54,890 Supplies 70,819 70,819 62,450 8,369 68,530 Other expenses 8,479 8,479 19,259 (10,780) 12,410 Total inspection services 1,696,101 1,696,101 1,642,702 53,399 1,619,703 Emergency management services: Salaries and wages 257, , ,366 27, ,367 Employee benefits 93,495 93,495 86,012 7,483 87,858 Purchased professional/technical services 15,760 14,595 13,422 1,173 10,484 Purchased property services 600 1,826 2,284 (458) 1,822 Maintenance 52,953 51,266 48,952 2, ,826 Other purchased service 26,217 26,217 20,265 5,952 16,732 Supplies 20,569 22,195 21, ,207 Capital expenditures 926,234-20,899 (20,899) 600,302 Other expenses 121, , ,905 18, ,798 Total emergency management services 1,514, , ,571 42,339 1,212,396 (Continued) 28

79 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) Public Safety (continued) Fire services: Salaries and wages $ 14,005,351 14,355,773 14,595,578 (239,805) 13,446,372 Employee benefits 4,703,730 4,822,909 4,805,557 17,352 4,385,055 Purchased professional/technical services 167,244 86,680 71,694 14, ,733 Purchased property services 57,022 57,022 50,262 6,760 58,314 Maintenance 227, , ,756 34, ,822 Other purchased service 349, , ,373 (4,497) 323,676 Supplies 648, , ,547 7, ,299 Capital expenditures ,022 (34,022) 83,860 Total fire services 20,158,498 20,647,565 20,844,789 (197,224) 19,330,131 Police services: Salaries and wages 20,674,166 20,674,166 20,984,693 (310,527) 20,492,897 Employee benefits 7,192,329 7,192,329 7,181,057 11,272 6,898,155 Purchased professional/technical services 339, , ,940 46, ,649 Purchased property services 23,509 23,509 38,233 (14,724) 79,788 Maintenance 875,710 1,305,080 1,150, , ,282 Other purchased service 961, , ,868 (24,220) 847,233 Supplies 1,903,518 2,010,775 2,104,525 (93,750) 1,857,156 Capital expenditures - 489, ,845 55, ,521 Other expenses Total police services 31,971,565 33,078,758 33,254,797 (176,039) 31,526,520 Traffic services: Salaries and wages 764, , , , ,916 Employee benefits 326, , ,200 50, ,420 Purchased professional/technical services - 12,875 16,316 (3,441) 9,926 Purchased property services 3,646 3,646 2,203 1,443 1,999 Maintenance 530, , , , ,091 Other purchased service 34,956 34,956 33,040 1,916 32,930 Supplies 937, , , , ,918 Capital expenditures 220, ,001 50, , ,121 Total traffic services 2,817,404 2,817,404 1,886, ,530 2,420,321 Animal services: Salaries and wages 284, , ,009 1, ,847 Employee benefits 150, , ,820 (368) 109,781 Purchased professional/technical services 134, , ,219 (43,181) 67,805 Purchased property services 6,600 6,600 7,169 (569) 6,427 Maintenance 19,200 19,200 10,118 9,082 50,124 Other purchased services 20,016 20,016 49,466 (29,450) 14,241 Supplies 133, , ,760 9, ,106 Capital expenditures ,970 (21,970) 39,288 Other expenses (933) 282 Total animal services 747, , ,464 (76,492) 625,901 (Continued) 29

80 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) Public Safety (continued) Contributions: Animal shelter $ ,247 Total contributions ,247 Total Public Safety 60,116,193 60,786,219 60,162, ,485 57,762,483 Culture and Recreation Library services: Salaries and wages 1,732,657 1,732,657 1,686,362 46,295 1,635,904 Employee benefits 604, , ,429 26, ,844 Purchased professional/technical services 101, , ,313 (96,170) 111,298 Purchased property services 18,267 18,267 19,801 (1,534) 18,063 Maintenance 102, ,525 84,813 17,712 78,926 Other purchased service 198, , ,673 42, ,720 Supplies 567, , ,045 44, ,872 Capital expenditures - 123, ,334 (13,334) - Other expenses 153, , ,000 (355) 149,357 Total library services 3,477,651 3,600,651 3,534,770 65,881 3,226,984 Parks: Salaries and wages 3,356,084 3,344,084 3,327,785 16,299 3,109,361 Employee benefits 1,491,852 1,477,952 1,452,441 25,511 1,357,060 Purchased professional/technical services 266, , ,563 (3,224) 325,185 Purchased property services 712, , ,727 60, ,572 Maintenance 538, , ,466 19, ,871 Other purchased service 234, , ,574 25, ,195 Supplies 762, , ,093 (3,995) 665,474 Capital expenditures - 272, ,432 (86,541) 116,650 Other expenses 27,010 27,010 31,439 (4,429) 23,630 Total parks 7,389,151 7,515,947 7,466,520 49,427 6,897,998 Recreation services: Salaries and wages 820, , ,559 15, ,832 Employee benefits 253, , ,932 8, ,832 Purchased professional/technical services 414, , ,475 (50,821) 397,021 Purchased property services (400) - Maintenance 10,107 10,107 12,680 (2,573) 10,693 Other purchased service 106, , ,811 (18,446) 112,596 Supplies 272, , ,282 17, ,406 Capital expenditures - 144, ,500 - Other expenses 16,242 16,242 17,033 (791) 11,503 Total recreation services 1,894,246 2,038,746 1,925, ,574 1,821,883 Total Culture and Recreation 12,761,048 13,155,344 12,926, ,882 11,946,865 (Continued) 30

81 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Expenditures (continued) Housing and Community Development Housing services: Salaries and wages $ 131, , ,886 (521) 105,396 Employee benefits 42,060 42,060 43,104 (1,044) 34,159 Purchased professional/technical services - - 1,000 (1,000) 2,708 Other purchased service 13,410 13,410 13,561 (151) 7,688 Supplies 2,846 2,846 2, ,245 Other expenses - 25,000-25,000 17,340 Total housing services 189, , ,147 22, ,536 Total Housing and Community Development 189, , ,147 22, ,536 Total expenditures 92,448,524 96,467,894 93,095,102 3,372,792 89,290,905 Excess of revenues over expenditures 6,590,295 5,343,911 14,325,730 8,981,819 13,548,111 Other Financing Sources (Uses) Proceeds from sale of capital assets: Sale of real estate , , ,376 Total proceeds from sale of capital assets , , ,376 Transfers in: Abandoned motor vehicles 50, , , ,000 Court security ,699 75,699 - Revenue in lieu of property taxes 4,268,113 4,268,113 4,268,113-4,184,431 Total transfers in 4,318,113 4,608,181 4,683,880 75,699 4,634,431 Transfers out: Cameron Park Zoo (1,726,608) (1,726,608) (1,726,608) - (1,694,653) Street Reconstruction (3,885,972) (3,957,472) (3,957,472) - (3,885,972) Street Cash CIP - (603,400) (603,400) - - Facilities-Cash CIP - (555,366) (555,366) - - Emergency Management Cash CIP - (926,234) (926,234) - - Equipment Replacement Cash CIP - (100,000) (100,000) - - Brownfields - (940,932) (940,932) - - TxDoT Brazos Riverwalk - (405,310) (405,310) - - Cottonwood Creek Golf Course - (356,706) (356,706) - (105,870) Transit services (118,844) (118,844) - 118,844 - Airport services (491,536) (491,536) (491,536) - (562,679) Health services (2,673,939) (2,673,939) (2,673,939) - (2,535,350) Ranger Hall of Fame (609,012) (609,012) (609,012) - (776,047) Economic Development Incentive (1,250,000) Housing demo-lot clearing (75,000) (125,000) (125,000) - (365,041) 2007 General obligation bonds (420,405) Grant (fire) - - (226,015) (226,015) (186,549) Grant (police) (77,497) (77,497) (88,952) (11,455) (94,581) Total transfers out (10,908,408) (13,667,856) (13,786,482) (118,626) (10,627,147) (Continued) 31

82 City of Waco, Texas Statement of Revenues, Expenditures and Changes in Fund Balances Budget and Actual General Fund (Continued) Year Ended September 30, 2014 (With Comparative Actual Amounts for the Year Ended September 30, 2013) Budgeted Amounts Actual Variance with Actual Original Final Amounts Final Budget Amounts Other financing sources (uses) Total other financing sources (uses) $ (6,590,295) (9,059,675) (8,997,324) 62,351 (5,702,340) Net change in fund balances - (3,715,764) 5,328,406 9,044,170 7,845,771 Fund balances, beginning of year, as previously stated 46,469,253 46,469,253 46,469,253-37,648,188 Prior period adjustment ,294 Fund balances, beginning of year, as restated 46,469,253 46,469,253 46,469,253-38,623,482 Fund balances, end of year $ 46,469,253 42,753,489 51,797,659 9,044,170 46,469,253 See accompanying notes to financial statements. 32

83 City of Waco, Texas Statement of Net Position Proprietary Funds September 30, 2014 Assets Governmental Activities - Business-type Activities - Enterprise Funds Internal Other Service Water Wastewater Solid Waste Funds Total Funds Current assets: Cash and investments $ 33,116,582 19,017,672 14,888,312 3,045,552 70,068,118 10,449,356 Accounts receivable, net of allowances 5,660,984 2,650,728 2,115, ,394 10,922,371 9,048 Due from other funds ,833 27, ,973 Intergovernmental receivable ,179,068 1,179,068 - Current portion of notes receivable - 46, ,065 - Restricted cash and investments 3,296,507 1,064, ,361,336 - Accrued interest on notes receivable - 3, ,356 - Inventories 295,383 14, ,243 1,179, ,875 Total current assets 42,369,456 22,797,429 17,003,577 5,617,090 87,787,552 10,984,252 Noncurrent assets: Restricted cash and investments 9,814,856 16,643, ,001 26,563,416 - Noncurrent portion of notes receivable - 505, ,410 - Advances to other funds 525, ,336 - Capital assets: Land 1,279,185 2,576,524 1,753, ,673 6,522,237 38,800 Buildings 9,526,184 10,851,569 1,370,137 59,345,076 81,092, ,153 Improvements other than buildings 274,473, ,061,853 23,936,392 58,258, ,730, ,289 Machinery and equipment 7,312,521 9,093,012 15,238,660 14,210,032 45,854,225 1,263,463 Museum collections ,160,924 2,160,924 - Construction work in progress 8,799,440 4,517,634 27,574 1,066,388 14,411,036 - Intangible water rights 32,482, ,482,879 - Less: accumulated depreciation and amortization (111,147,997) (49,326,746) (32,652,811) (58,508,988) (251,636,542) (1,392,817) Total capital assets 222,725,937 99,773,846 9,673,807 77,444, ,618, ,888 Total noncurrent assets 233,066, ,922,815 9,673,807 77,549, ,212, ,888 Total assets 275,435, ,720,244 26,677,384 83,166, ,999,871 11,932,140 Deferred Outflows of Resources Deferred outflows of resources: Deferred losses on refundings of debt 2,031, ,742 24,721-2,487,815 - Total deferred outflows of resources 2,031, ,742 24,721-2,487,815 - Liabilities Liabilities: Current liabilities: Accounts payable 949,091 1,088, , ,155 2,756, ,016 Accrued liabilities 782, , ,607 1,135,819 2,476, ,504 Unearned revenue ,030 96,030 - Due to other funds , ,766 - Compensated absences payable 697, , , ,509 1,931, ,732 (Continued) 33

84 City of Waco, Texas Statement of Net Position Proprietary Funds (Continued) September 30, 2014 Liabilities (Continued) Governmental Activities - Business-type Activities - Enterprise Funds Internal Other Service Water Wastewater Solid Waste Funds Total Funds Liabilities: Current liabilities: Refundable contracts $ 434,295 50, ,295 - Notes payable 72, ,555 - Escrow funds Bonds payable 7,540,000 3,545, ,000-11,775,000 - Accrued interest payable 1,024, ,880 31,776-1,568,893 - Estimated claims and judgments ,212,803 11,500,250 5,906,146 1,536,598 2,909,279 21,852,273 4,357,593 Current liabilities payable from restricted assets: Accounts payable 737,826 1,064, ,802,655 - Customer deposits 2,558, ,558,681-3,296,507 1,064, ,361,336 - Total current liabilities 14,796,757 6,970,975 1,536,598 2,909,279 26,213,609 4,357,593 Noncurrent liabilities: Refundable contracts 1,325, , ,467,948 - Estimated landfill closure and post-closure care costs - - 4,516,860-4,516,860 - Advances from other funds , ,704 - Compensated absences payable 270, , , ,426 1,067,487 - Net pension obligation 734, , ,840-1,696, ,267 Bonds payable 145,382,028 61,490,378 4,369, ,242,008 - Notes payable 1,825, ,825,882 - Total noncurrent liabilities 149,538,934 62,354,087 9,558,335 1,059, ,510, ,267 Total liabilities 164,335,691 69,325,062 11,094,933 3,968, ,724,095 4,731,860 Net Position Net position: Net investment in capital assets 77,991,979 51,621,227 4,638,926 77,444, ,696, ,888 Restricted for capital projects ,274,319 1,274,319 - Unrestricted 35,139,267 19,205,697 10,968, ,363 65,792,573 6,252,392 Total net position $ 113,131,246 70,826,924 15,607,172 79,198, ,763,591 7,200,280 See accompanying notes to financial statements. 34

85 City of Waco, Texas Statement of Revenues, Expenses, and Changes in Net Position Proprietary Funds Year Ended September 30, 2014 Operating revenues: Charges for services $ 38,094,499 20,932,833 16,601,316 6,551,889 82,180,537 19,447,445 Net merchandise sales , ,485 - Contributions , ,140 - Other 500, , ,271 1,399,147 2,575,555 48,428 Total operating revenues 38,594,913 21,343,556 16,866,587 9,016,661 85,821,717 19,495,873 Operating expenses: Salaries and wages 4,921,571 2,781,839 3,004,789 7,055,945 17,764,144 2,354,198 Employee benefits 2,055,459 1,091,922 1,467,586 2,375,502 6,990, ,808 Purchased professional/ technical services 1,299,056 1,682,076 1,465,881 1,702,971 6,149,984 1,684,985 Purchased property services 152, , , ,516 65,277 Maintenance 1,861,631 1,328,486 1,832, ,362 5,946,480 74,369 Other purchased services 784, , ,428 1,190,054 2,423, ,252 Supplies 4,350,721 2,054,334 1,838,997 2,679,216 10,923, ,619 Other 3,730,948 3,028,465 2,485,218 1,056,458 10,301,089 12,846,596 Depreciation/amortization 8,996,493 4,594,225 3,420,725 5,409,893 22,421, ,603 Total operating expenses 28,152,323 17,007,065 15,664,625 23,051,362 83,875,375 19,155,707 Operating income (loss) 10,442,590 4,336,491 1,201,962 (14,034,701) 1,946, ,166 Nonoperating revenues (expenses): Investment earnings 94,682 63,859 33,540 5, ,346 26,872 Other income 5, , ,340 - Hotel/motel tax ,403,171 2,403,171 - Contributions , ,707 - Intergovernmental revenue ,740,053 3,740,053 - Bond issuance costs (34,042) (101,070) - - (135,112) - Interest expense and fiscal charges (4,812,509) (2,155,448) (129,934) - (7,097,891) - Total nonoperating revenues (expenses) (4,746,709) (2,192,659) (96,394) 6,543,376 (492,386) 26,872 Income (loss) before contributions and transfers 5,695,881 2,143,832 1,105,568 (7,491,325) 1,453, ,038 Capital contributions 244, ,619,104 1,863,712 - Transfers in ,333,862 3,333,862 - Transfers out (3,138,280) (790,696) (339,137) (150,000) (4,418,113) - Changes in net position 2,802,209 1,353, ,431 (2,688,359) 2,233, ,038 Total net position, beginning of year, as restated 110,329,037 69,473,788 14,840,741 81,886, ,530,174 6,833,242 Total net position, end of year $ 113,131,246 70,826,924 15,607,172 79,198, ,763,591 7,200,280 See accompanying notes to financial statements. Governmental Business-type Activities - Enterprise Funds Activities - Internal Other Service Water Wastewater Solid Waste Funds Total Funds 35

86 City of Waco, Texas Statement of Cash Flows Proprietary Funds Year Ended September 30, 2014 Governmental Business-type Activities - Enterprise Funds Activities - Internal Other Service Water Wastewater Solid Waste Funds Total Funds Cash flows from operating activities: Cash received from customers $ 39,177,594 21,593,356 16,897,964 9,004,232 86,673,146 19,487,722 Cash paid to suppliers for goods and services (12,061,870) (7,937,962) (7,586,389) (8,400,068) (35,986,289) (15,716,694) Cash paid to employees for services (6,969,375) (3,823,003) (4,436,326) (9,388,643) (24,617,347) (3,309,988) Net cash provided by (used for) operating activities 20,146,349 9,832,391 4,875,249 (8,784,479) 26,069, ,040 Cash flows from noncapital financing activities: Hotel/motel tax ,392,102 2,392,102 - Intergovernmental revenue ,396,252 5,396,252 - Contributions , ,707 - Passenger facility charges , ,180 - Payments to other funds (1,640,868) (1,640,868) - Transfers from other funds ,333,862 3,333,862 - Transfer to other funds (3,138,280) (790,696) (339,137) (150,000) (4,418,113) (722,046) Net cash provided by (used for) noncapital financing activities (3,138,280) (790,696) (339,137) 9,726,235 5,458,122 (722,046) Cash flows from capital and related financing activities: Acquisition of capital assets (7,745,064) (4,343,555) (17,211) (2,031,407) (14,137,237) (236,805) Proceeds from sale of debt 2,149,474 6,142, ,292,308 - Insurance recoveries ,546 33,546 - Capital contributions - 112,054-2,505,302 2,617,356 - Principal paid on debt (6,650,286) (4,049,571) (945,000) - (11,644,857) - Interest paid on debt (6,154,249) (2,544,087) (211,158) - (8,909,494) - Payment of bond issuance costs (34,042) (101,070) - - (135,112) - Net cash provided by (used for) capital and related financing activities (18,434,167) (4,783,395) (1,173,369) 507,441 (23,883,490) (236,805) Cash flows from investing activities: Rental revenue 5, ,160 - Investment earnings 94,682 64,133 33,540 5, ,620 26,872 Note payments from other entities - 45, ,042 - Net cash provided by investing activities 99, ,175 33,540 5, ,822 26,872 Net increase (decrease) in cash and cash equivalents (1,326,256) 4,367,475 3,396,283 1,454,462 7,891,964 (470,939) Cash and cash equivalents, beginning of year 47,554,201 32,358,585 11,492,029 1,696,091 93,100,906 10,920,295 Cash and cash equivalents, end of year $ 46,227,945 36,726,060 14,888,312 3,150, ,992,870 10,449,356 (Continued) 36

87 City of Waco, Texas Statement of Cash Flows Proprietary Funds (Continued) Year Ended September 30, 2014 Business-type Activities - Enterprise Funds Governmental Activities - Internal Service Other Water Wastewater Solid Waste Funds Total Funds Reconciliation of operating income (loss) to net cash provided by (used for) operating activities: Operating income (loss) $ 10,442,590 4,336,491 1,201,962 (14,034,701) 1,946, ,166 Adjustments to reconcile operating income (loss) to net cash provided by (used for) operating activities: Provision for uncollectible accounts receivable 25,729 8,288 (9) - 34,008 - Depreciation/amortization 8,996,493 4,594,225 3,420,725 5,409,893 22,421, ,603 Changes in assets and liabilities: Decrease (increase) in assets: Accounts receivable 556, ,512 31,386 (19,732) 810,118 (8,151) Inventories (17,651) (4,400) - (61,606) (83,657) (74,631) Increase (decrease) in liabilities: Accounts payable 250, ,792 (21,970) (122,717) 767,255 27,630 Accrued liabilities (139,343) (37,049) 2,864 (12,824) (186,352) 205,469 Unearned revenue ,303 7,303 - Estimated landfill closure and post-closure care costs , ,686 - Compensated absences payable (23,801) 28,229 10,261 49,905 64,594 (94,423) Net pension obligation 5,429 3,303 3,344-12,076 2,593 Customer deposits 49, ,801 - Estimated claims and judgments (57,216) Net cash provided by (used for) operating activities $ 20,146,349 9,832,391 4,875,249 (8,784,479) 26,069, ,040 Noncash investing, capital, and financing activities: Contributions of capital assets $ 244, , ,997 - See accompanying notes to financial statements. 37

88 City of Waco, Texas Statement of Fiduciary Net Position - Agency Funds September 30, 2014 Agency Funds Assets Cash and investments $ 2,753,501 Accounts receivable 538 Note receivable 229,547 Total assets $ 2,983,586 Liabilities Due to other agencies and individuals $ 2,983,586 Total liabilities $ 2,983,586 See accompanying notes to financial statements. 38

89 City of Waco, Texas Notes to Financial Statements September 30, 2014 I. Summary of Significant Accounting Policies A. Reporting Entity The City of Waco, Texas (the City) is a municipal corporation governed by an elected mayor and a five-member Council. The accompanying financial statements present the government and its component units, entities for which the government is considered to be financially accountable. Each discretely presented component unit is reported in a separate column in the government-wide financial statements (see note below for description) to emphasize that it is legally separate from the government. All fiduciary activities are reported only in the fund financial statements. Discretely presented component units - The following discretely presented component units are included in the reporting entity of the City: The Baylor Waco Stadium Authority (the Authority) was created in 2014 as a nonprofit local government corporation for the purpose of managing and operating Baylor University s McLane Stadium (the Stadium) for all events that are not designated Baylor University events. The Authority is governed by five directors who are appointed by the City Council and may be removed by the City Council at any time, with or without cause. In March 2014, the Authority entered into a 30-year tri-party operating agreement with Baylor University (BU) and the City. In the event the operating agreement terminates, operating funds in excess of obligations payable will be used in the following priority: repayment of funds advanced to the Authority by BU that are subject to reimbursement; repairs and maintenance of the Stadium; and distribution to BU and the City in proportion to each entity s contribution to the construction of the Stadium. Separately issued financial reports for the Authority may be obtained from the Authority at 1001 South M.L.K. Jr. Blvd., Waco, Texas. The Central Waco Development Corporation (the CWDC) was created in 1979 by the City for the purpose of promoting and developing commercial, industrial and manufacturing enterprises. The CWDC is governed by five members who are appointed by the City Council and may only be removed with cause. Additionally, the CWDC is prohibited from issuing bonded debt without the approval of the City Council. The CWDC does not issue separate financial statements. The Waco Health Facilities Development Corporation (the WHFDC) was created in 1983 under the Health Facilities Development Act as a public, nonprofit corporation for the purpose of issuing obligations in order to finance all or part of the cost of one or more health facilities to assist with the 39

90 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) A. Reporting Entity (continued) maintenance of public health. The WHFDC is governed by five members who are appointed by the City Council and may only be removed with cause. Additionally, the WHFDC is prohibited from issuing bonded debt without the approval of the City Council. The WHFDC does not issue separate financial statements. B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenue, are reported separately from business-like activities, which rely to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from certain legally separate component units for which the primary government is financially accountable. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function or segment. Certain indirect costs have been included as part of the program expenses reported for the various functional activities. Program revenue includes (1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment, and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenue are reported instead as general revenue. Separate financial statements are provided for governmental funds, propriety funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the fund financial statements. C. Measurement Focus, Basis of Accounting and Financial Statement Presentation The accounting and financial reporting treatment is determined by the applicable measurement focus and basis of accounting. Measurement focus indicates the type of resources being measured such as current financial resources or economic 40

91 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (continued) resources. The basis of accounting indicates the timing of transactions or events for recognition in the financial statements. The government-wide financial statements are reported using the economic resources measurement focus, and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Property taxes are recognized as revenue in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available if collected within 60 days of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. General capital asset acquisitions are reported as expenditures in governmental funds. Issuance of longterm debt and acquisitions under capital leases are reported as other financing sources. The proprietary funds are reported using the economic resources measurement focus and the accrual basis of accounting for reporting its assets and liabilities. Property taxes, sales taxes, franchise taxes, licenses, and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. Entitlements are recorded as revenues when all eligibility requirements are met, including any time requirements, and the amount is received during the period or within the availability period for this revenue source (within 60 days of year-end). Expenditure-driven grants are recognized as revenue when the qualifying expenditures have been incurred and all other eligibility requirements have been met, and the amount is received during the period or within the availability period for this revenue source (within 60 days of year-end). All other revenue items are considered to be measurable and available only when cash is received by the government. 41

92 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) C. Measurement Focus, Basis of Accounting and Financial Statement Presentation (continued) The City reports the following major governmental funds: The general fund is the City s primary operating fund. It accounts for all financial resources of the general government, except those required to be accounted for in another fund. The City reports the following major proprietary funds: The water fund accounts for the activities of the City s water services. The wastewater fund accounts for the activities of the City s sewer services. The solid waste fund accounts for the activities of the City s sanitation services. Additionally, the City reports the following fund types: Internal service funds account for insurance/risk management services, health insurance, fleet services, and engineering services provided to other departments or agencies of the government on a cost reimbursement basis. Agency funds account for receipts and disbursements for the Urban Renewal Agency, the Heart of Texas Housing Finance Corporation, and Waco Public Improvement District No. 2. As a general rule, the effect of interfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are charges between the City s water and wastewater functions and various other functions of the government. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include: (1) charges to customers or applicants for goods, services, or privileges provided, (2) operating grants and contributions, and (3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s 42

93 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) C. Measurement Focus, Basis of Accounting and Financial Statement Presentation (continued) principal ongoing operations. The principal operating revenues of the City s enterprise funds and internal service funds are charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance Deposits and Investments The City s cash and cash equivalents for purposes of reporting cash flows of proprietary funds consist of cash on hand, demand deposits, certificates of deposit and deposits in the City s internal cash and investment pool. State statutes authorize the City to invest in U. S. Treasury and agency securities, commercial paper, money market mutual funds, repurchase agreements, and government investment pools. Investments for the City, as well as for its component units, are reported at fair value. The City invests in local government investment pools (LGIPs) that were created to function as money market mutual funds within the meaning of Rule 2a-7 of the Investment Company Act of Each of these LGIPs seeks to maintain a constant $1.00 net asset value per share. Receivables and Payables Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either due to/from other funds (i.e., the current portion of interfund loans) or advances to/from other funds (i.e., the noncurrent portion of interfund loans). All other outstanding balances between funds are reported as due to/from other funds. Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as internal balances. Advances between funds, as reported in the fund financial statements, are offset by a fund balance reserve account in applicable governmental funds to indicate that they are not available for appropriation and are not expendable available financial resources. 43

94 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (continued) Receivables and Payables (continued) All trade and property tax receivables are shown net of an allowance for uncollectibles. Trade accounts receivable in excess of 180 days are estimated to be uncollectible and comprise the trade accounts receivable allowance for uncollectibles. The property tax receivable allowance is equal to 7.05 percent of outstanding property taxes at September 30, Property taxes are levied on October 1 and attach as an enforceable lien on property as of January 31. Statements are mailed on October 1, or as soon thereafter as possible, and are due upon receipt. All unpaid taxes become delinquent if not paid before February 1 of the following year. Inventories All inventories are valued using the average cost method. Inventories of governmental funds are recorded as expenditures when consumed rather than when purchased. Restricted Assets Certain proceeds of the enterprise fund bonds and certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond covenants. Capital Assets Capital assets, which include property, plant, equipment, infrastructure (e.g., roads, bridges, and similar items), and water rights are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. 44

95 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (continued) Capital Assets (continued) Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. The total interest expense incurred during the current fiscal year was $7,510,942 for business-type activities. Of this amount, $413,051 were included as part of the cost of capital assets under construction in connection with water and wastewater fund construction projects. Property, plant and equipment is depreciated using the straight-line method over the following useful lives: Assets Years Landfill improvements 3 5 Buildings Water rights 35 Improvements 5 50 Equipment 5 20 Infrastructure Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statements element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. The government only has one item that qualifies for reporting in this category. It is the deferred losses on refundings of debt reported in the government-wide statement of net position. A deferred loss on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that 45

96 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (continued) Deferred Outflows/Inflows of Resources (continued) applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The government has only one type of item, which arises only under a modified accrual basis of accounting, that qualifies for reporting in this category. Accordingly, the item, unavailable revenue, is reported only in the governmental funds balance sheet. The governmental funds report unavailable revenues from multiple sources: property taxes, court fines, special assessments, etc. These amounts are deferred and recognized as an inflow of resources in the period that the amounts become available. Compensated Absences It is the City s policy to permit employees to accumulate earned but unused vacation and sick pay benefits. All vacation pay is accrued when incurred in the governmentwide and proprietary fund financial statements. For governmental activities and proprietary funds, a liability is reported for a portion of accumulating sick leave when it is probable that the government will make termination payments. A liability for compensated absences is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. Long-term Obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net position. Bond premiums, as well as issuance costs, are deferred and amortized over the life of the bonds using the interest method. Bonds payable are reported net of the applicable bond premium. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 46

97 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (continued) Fund Balance In the fund financial statements, governmental funds fund balances classified as restricted are balances with constraints placed on the use of resources by creditors, grantors, contributors, or laws or regulations of other governments. Fund balances classified as committed can only be used for specific purposes pursuant to constraints imposed by the City Council through a resolution. Assigned fund balances are constrained by an intent to be used for specific purposes but are neither restricted nor committed. Assignments are also approved by the City Council through a resolution. For the classification of governmental fund balances, the City considers the order of expenditures to be made from the most restrictive first when more than one classification is available. The order of spending available resources is as follows: restricted, committed, assigned, and unassigned. The City Council has adopted Financial Management Policy Statements that include the policy to strive to maintain the general fund unassigned fund balance at 18% of budgeted revenues. General fund unassigned fund balance at September 30, 2014 was 18.97% of fiscal year 2015 budgeted revenues. The following detail of fund balances by classification is shown for major and nonmajor governmental funds: General Other Fund Funds Total Fund balances: Nonspendable: Inventory $ 734, ,557 Real estate held for resale 6,160 40,061 46,221 Advances to other funds - 168, ,368 Parks and cemetery care - 478, ,848 Restricted for: Municipal information 703, ,924 Debt service - 185, ,902 Capital projects - 11,828,967 11,828,967 Tax increment zone activities - 10,891,785 10,891,785 Waco Public Improvement District - 645, ,008 Housing and community development - 2,333,652 2,333,652 Public safety 83,856 1,406,274 1,490,130 Culture and recreation 918,377 1,302,930 2,221,307 47

98 City of Waco, Texas Notes to Financial Statements (Continued) I. Summary of Significant Accounting Policies (continued) D. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position/Fund Balance (continued) Fund Balance (continued) General Other Fund Funds Total Fund balances: (continued) Committed to: Economic development 9,532,164-9,532,164 Capital projects - 2,413,913 2,413,913 Public health - 561, ,880 Assigned to: Capital improvements 15,050,171-15,050,171 Economic development 3,048,263-3,048,263 Housing and community development 25,000-25,000 Public safety 140, ,595 Public works 4,677-4,677 Culture and recreation 16,230-16,230 Other 490, ,289 Unassigned 21,043,396-21,043,396 $ 51,797,659 32,257,588 84,055,247 Net Position In the government-wide and proprietary fund financial statements, net position represents the difference between assets and liabilities. Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net position is reported as restricted when there are limitations imposed on its use either through the enabling legislations adopted by the City or through external restrictions imposed by creditors, grantors, laws or regulations of other governments. When both restricted and unrestricted resources are available for use, it is the City s policy to use restricted resources first, then unrestricted resources as they are needed. 48

99 City of Waco, Texas Notes to Financial Statements (Continued) II. Reconciliation of Government-wide and Fund Financial Statements A. Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the Government-wide Statement of Net Position The governmental fund balance sheet includes a reconciliation between fund balance total governmental funds and net position governmental activities as reported in the government-wide statement of net position. One element of that reconciliation explains, long-term liabilities are not due and payable in the current period and, therefore, are not reported in the funds. The details of this $117,530,483 difference are as follows: Capital lease $ 12,443 Serial bonds and certificates of obligation 87,120,000 Less: deferred charge on refunding (to be amortized as interest expense) (463,791) Plus: issuance premium 1,419,551 Accrued interest payable 640,699 Compensated absences 17,945,885 Net pension obligation 9,693,119 Refundable contracts 80,007 Contracts payable 830,000 Net other post-employment benefit obligation 252,570 Net adjustment to reduce fund balance - total governmental funds to arrive at net position - governmental activities $ 117,530,483 B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances and the Government-wide Statement of Activities The governmental fund statement of revenue, expenditures and changes in fund balances includes a reconciliation between net changes in fund balances total governmental fund and changes in net position of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains, Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The details of this $(4,392,893) difference are as follows: Capital outlay $ 11,713,167 Depreciation expense (16,106,060) Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities $ (4,392,893) 49

100 City of Waco, Texas Notes to Financial Statements (Continued) II. Reconciliation of Government-wide and Fund Financial Statements (continued) B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances and the Government-wide Statement of Activities (continued) Another element of that reconciliation states, The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins, transfers, and donations) is to increase net position. The details of this $2,608,669 difference are as follows: Donations and transfers of capital assets increase net position in the statement of activities, but do not appear in the governmental funds because they are not financial resources. $ 2,608,669 Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities $ 2,608,669 Another element of that reconciliation states, Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. The details of this $419,096 difference are as follows: Court fines $ 141,357 Property taxes 268,682 Special assessments 9,057 Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net position ofgovernmental activities $ 419,096 Another element of that reconciliation states, The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. The details of this $3,685,268 difference are as follows: 50

101 City of Waco, Texas Notes to Financial Statements (Continued) II. Reconciliation of Government-wide and Fund Financial Statements (continued) B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances and the Government-wide Statement of Activities (continued) Debt issued or incurred: Issuance of general obligation and refunding debt $ (1,645,000) Plus: premium on issuance (59,040) Principal repayments: General obligation debt 5,340,143 Capital lease 49,165 Net adjustment to increase net changes in fund balances- total governmental funds to arrive at changes in net position of governmental activities $ 3,685,268 Another element of that reconciliation states, Some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. The details of this $(641,764) difference are as follows: Net other post-employment benefit obligation $ (20,254) Compensated absences (738,942) Net pension obligation (67,750) Accrued interest 35,514 Amortization of deferred charge on refunding (112,786) Amortization of bond premiums 262,454 Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net position of governmental activities $ (641,764) III. Stewardship, Compliance and Accountability A. Budgetary Information Annual budgets are adopted on a basis consistent with generally accepted accounting principles. Annual, appropriated budgets are adopted for the general fund, health fund and general obligation debt fund. All annual appropriations lapse at fiscal yearend. Project-length financial plans are adopted for all capital projects funds and the grant fund. 51

102 City of Waco, Texas Notes to Financial Statements (Continued) III. Stewardship, Compliance and Accountability (continued) A. Budgetary Information (continued) Prior to August 1, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing the following October 1. The operating budget includes proposed expenditures and the means of financing them. A public hearing is conducted to obtain taxpayer comments. Prior to October 1, the budget is legally enacted through passage of a resolution. Expenditures may not legally exceed appropriations at the fund level for each legally adopted annual budget. The City Council made supplemental budgetary appropriation changes during the fiscal year. In addition, transfer of appropriations between funds requires the approval of the City Council. The reported budgetary data has been revised for these amendments legally authorized during the year. Encumbrance accounting is employed in governmental funds. Encumbrances (e.g. purchase orders, contracts) outstanding at year-end do not constitute expenditures or liabilities because the commitments will be re-appropriated and honored during the subsequent year. Outstanding encumbrances for governmental funds as of September 30, 2014 are $942,199 for the general fund and $10,562,242 for other nonmajor funds. B. Deficit Fund Position Deficit net position in individual nonmajor funds at September 30, 2014 consist of the following: Net Investment in Total Capital Assets Unrestricted Net Position Nonmajor Enterprise Fund: Cottonwood Creek Golf Course $ 1,146,091 (1,242,240) (96,149) The Cottonwood Creek Golf Course Fund is used to account for the City s golf course facility. Operations continue to be reviewed with emphasis on improving pro shop and concession operations. The change in net position was $95,327 for the fiscal year as compared with $(61,208) in the prior year. 52

103 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detail Notes on All Funds A. Deposits and Investments As of September 30, 2014, the City had the following investments: Weighted Percent Average Fair of Maturity Investment Value Portfolio (in years) Texas Local Government Investment Pool (TexPool) $ 3,594, % - Texas Short-Term Asset Reserve (TexSTAR) 877, % - Total local government investment pools 4,472, % - U. S. Treasury securities 3,011, % 2.20 U. S. Federal agency securities 30,960, % 1.68 Total investments $ 38,444, % 1.53 Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. In accordance with its investment policy, the City manages its exposure to declines in fair value by limiting the maturities of its investments as follows: maturities of U. S. Treasury obligations, U. S. Federal agency securities and repurchase agreements cannot exceed three years. Further, the weighted average maturity of the City s investment portfolio shall at no time exceed one year. Credit Risk For an investment, credit risk is the risk that an investment issuer or other counterparty to an investment will not fulfill obligations. Texas Government Code Chapter 2256, Public Funds Investment Act, restricts the types of investments in which the City may invest. The City s investment policy addresses credit quality by further restricting authorized investments to the following: U. S. Treasury obligations Other obligations of the U. S. Government guaranteed by the Federal Deposit Insurance Corporation (FDIC) or by the explicit full faith and credit of the United States. 53

104 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detail Notes on All Funds (continued) A. Deposits and Investments (continued) Credit Risk (continued) U. S. Federal agency securities Repurchase agreements and flexible repurchase agreements, collateralized by U. S. Treasury obligations or U. S. federal agency securities, or by passthrough mortgage-backed securities issued by the U. S. federal agencies. Money market mutual funds rated not less than AAAm by Standard & Poor s, Aaa by Moody s or AAA/V1+ by Fitch Local Government investment pools rated not less than AAAm by Standard & Poor s, Aaa by Moody s or AAA/V1+ by Fitch The City s investments in TexPool and TexSTAR are rated AAAm by Standard & Poor s; and U. S. Federal agency securities are rated AAA by Fitch, Aaa by Moody s, and AA+ by Standard and Poor s. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributable to the magnitude of a government s investments in the securities of a single issuer. The City s investment policy includes an investment objective of seeking diversification to avoid unreasonable risk. More than 5% of the City s investments at September 30, 2014 were in securities of the following issuers: Percent of U. S. Agency Issuer Fair Value Portfolio Federal Farm Credit Bank $ 1,997, % Federal Home Loan Bank 7,994, % Federal Home Loan Mortgage Corporation 14,963, % Federal National Mortgage Association 6,004, % Custodial Credit Risk The custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside 54

105 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detail Notes on All Funds (continued) A. Deposits and Investments (continued) Custodial Credit Risk (continued) party. City policy requires all deposits to be fully secured in accordance with the Texas Government Code, Chapter 2257, by either surety bonds, letters of credit of the United States or its agencies and instrumentalities, or by eligible securities held by an independent third-party custodian. For an investment, custodial credit risk is the risk that in the event of the failure of the counter-party, the City would not be able to recover the value of its investment or collateralized securities that are in the possession of an outside third party. The City s investment policy requires that the purchase of investment securities be settled on a delivery basis and that ownership of all securities be perfected in the name of the City. Reconciliation of Cash and Investments Carrying amount of deposits and cash on hand $ 156,366,885 Carrying amount of investments 38,444,798 Total $ 194,811,683 Cash and investments - governmental activities $ 89,912,756 Cash and investments - business-type activities 70,068,118 Restricted cash and investments - businesstype activities 30,924,752 Component units, excluding Baylor Waco Stadium Authority 36,435 Agency funds 2,753,501 Other participants' undivided interest in WMARSS cash and investments 1,116,121 Total $ 194,811,683 The City issues certificates of obligation to fund capital projects for governmental and business-type activities. Interest earnings on the unspent proceeds of all certificates of obligation are accounted for in the capital projects fund. 55

106 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detail Notes on All Funds (continued) A. Deposits and Investments (continued) Local Government Investment Pools TexPool. The Comptroller of Public Accounts (the Comptroller) is the sole officer, director and shareholder of the Texas Treasury Safekeeping Trust Company (the Trust Company) which is authorized to operate TexPool. Federated Investors, Inc. provides asset management services to TexPool. Additionally, the Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. The advisory board members review the investment policy and management fee structure. TexPool uses amortized cost rather than fair value to report net assets to compute share prices. TexSTAR. TexSTAR is a Texas public funds investment pool that is co-administered by J.P. Morgan Fleming Asset Management and First Southwest Asset Management, Inc. TexSTAR is managed by a five-member governing board comprised of three representatives of eligible governmental entities and one member designated by each of the co-administrators. The pool uses amortized cost rather than the fair value to report net assets to compute share prices. B. Receivables Receivables as of year-end for the City s individual major funds and nonmajor, internal service, and fiduciary funds in the aggregate, including the applicable allowances for uncollectible accounts, are as follows: Solid Nonmajor and General Water Wastewater Waste Other Funds Total Receivables: Taxes $ 7,901, ,892 8,428,670 Accounts 17,343,075 7,331,051 3,734,339 3,476,807 1,499,626 33,384,898 Special assessments ,315 11,315 Intergovernmental 1,042, ,681,920 3,724,255 Notes ,475-7,240,198 7,791,673 Gross receivables 26,287,188 7,331,051 4,285,814 3,476,807 11,959,951 53,340,811 Less: allowance for uncollectibles 13,683,190 1,670,067 1,083,611 1,361,542 5,654,457 23,452,867 Net total receivables $ 12,603,998 5,660,984 3,202,203 2,115,265 6,305,494 29,887,944 56

107 IV. Detail Notes on All Funds (continued) B. Receivables (continued) City of Waco, Texas Notes to Financial Statements (Continued) In the general fund, $922,221 of the intergovernmental receivable reported is not expected to be collected until fiscal year Revenues of the water, wastewater, and solid waste funds are reported net of uncollectible amounts. Total uncollectible amounts related to revenues of the current period are as follows: Uncollectibles related to water sales $ 25,729 Uncollectibles related to wastewater charges 8,288 Uncollectibles related to solid waste charges (9) Total uncollectibles of the current fiscal year $ 34,008 C. Capital Assets Capital asset activity for the year ended September 30, 2014 was as follows: Primary Government Balance Balance October 1, September 30, 2013 Increases Decreases 2014 Governmental activities: Capital assets, not being depreciated: Land $ 44,816, ,776-45,659,048 Construction in progress 5,679,635 3,273,231 (4,611,727) 4,341,139 Total capital assets not being depreciated 50,495,907 4,116,007 (4,611,727) 50,000,187 Capital assets, being depreciated: Buildings 68,049,191 1,361,581 (57,294) 69,353,478 Machinery and equipment 44,404,968 6,687,337 (1,226,946) 49,865,359 Improvements other than buildings 56,635,043 2,823,888 (113,156) 59,345,775 Infrastructure 260,147,197 4,209, ,356,972 Total capital assets being depreciated 429,236,399 15,082,581 (1,397,396) 442,921,584 Less accumulated depreciation: Buildings 15,463,514 2,420,553 (57,294) 17,826,773 Machinery and equipment 30,291,372 4,011,891 (1,198,727) 33,104,536 Improvements other than buildings 23,086,360 2,975,505 (113,156) 25,948,709 Infrastructure 152,174,026 6,817, ,991,740 Total accumulated depreciation 221,015,272 16,225,663 (1,369,177) 235,871,758 Total capital assets, being depreciated, net 208,221,127 (1,143,082) (28,219) 207,049,826 Total capital assets, net $ 258,717,034 2,972,925 (4,639,946) 257,050,013 57

108 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) C. Capital Assets (continued) Primary Government Balance Balance October 1, September 30, 2013 Increases Decreases 2014 Business-type activities: Capital assets, not being depreciated/ amortized: Land $ 6,311, ,779-6,522,237 Construction work in progress 9,889,387 12,047,583 (7,525,934) 14,411,036 Museum collections 2,133,424 27,500-2,160,924 Total assets not being depreciated/amortized 18,334,269 12,285,862 (7,525,934) 23,094,197 Capital assets, being depreciated: Buildings 81,092, ,092,966 Machinery and equipment 44,813,771 1,907,352 (866,898) 45,854,225 Improvements other than buildings 469,156,084 9,625,951 (51,603) 478,730,432 Water rights - impound fee 32,482, ,482,879 Total capital assets, being depreciated/amortized 627,545,700 11,533,303 (918,501) 638,160,502 Less accumulated depreciation/amortization: Buildings 29,649,722 2,658,513-32,308,235 Machinery and equipment 28,875,327 4,041,808 (854,105) 32,063,030 Improvements other than buildings 163,686,158 14,794,195 (51,603) 178,428,750 Water rights - impound fee 7,909, ,820-8,836,527 Total accumulated deprecation/ amortization 230,120,914 22,421,336 (905,708) 251,636,542 Total capital assets being depreciated/amortized, net 397,424,786 (10,888,033) (12,793) 386,523,960 Total capital assets, net $ 415,759,055 1,397,829 (7,538,727) 409,618,157 Depreciation expense was charged to functions/programs as follows: Governmental activities: General government $ 751,549 Public works 7,234,499 Public safety 3,779,275 Culture and recreation 4,391,407 Public health 67,233 Housing and community development 1,700 Total depreciation expense - governmental activities $ 16,225,663 58

109 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) C. Capital Assets (continued) Depreciation/amortization expense was charged to functions/programs as follows: Business-type activities: Water $ 8,996,493 Wastewater 4,594,225 Solid waste 3,420,725 Airport 2,016,312 Convention services 824,217 Ranger Hall of Fame 126,301 Cameron Park Zoo 1,117,988 Transit services 1,150,524 Cottonwood Creek Golf Course 174,551 Total depreciation/amortization expense - business-type activities $ 22,421,336 Construction commitments The City has active construction projects as of September 30, At year-end, the City s commitments with contractors are as follows: Spent Remaining Project to Date Commitments Street projects $ 2,503,412 2,927,912 Water projects 8,799,440 2,416,958 Wastewater projects 4,517,634 3,824,374 Solid waste projects 27,574 2,249,583 Airport projects 598,798 2,949,526 Parks projects 1,514,748 1,310,807 Other projects 790, ,532 Total $ 18,752,175 15,809,692 59

110 IV. Detailed Notes on All Funds (continued) City of Waco, Texas Notes to Financial Statements (Continued) D. Interfund Receivables, Payables and Transfers The composition of interfund balances as of September 30, 2014 is as follows: Due to/from other funds Receivable Fund Payable Fund Amount Nonmajor business-type Nonmajor governmental $ 27,833 General Nonmajor governmental 464,316 General Nonmajor business-type 690,766 Nonmajor governmental Nonmajor governmental 5,538,304 General Internal service 251,973 Nonmajor governmental General 422,218 $ 7,395,410 All balances resulted from the time lag between the dates that (1) interfund goods and services are provided or reimbursable expenditures occur, (2) transactions are recorded in the accounting system, and (3) payments between funds are made. Advances to/from other funds Receivable Fund Payable Fund Amount Water Nonmajor business-type $ 525,336 Nonmajor governmental Nonmajor business-type 168,368 $ 693,704 All advances resulted from loans to Cottonwood Creek Golf Course fund made for operating and capital improvements since the City took over management responsibilities. Amounts are not expected to be paid within the next fiscal year. Interfund transfers Transfer in Nonmajor Nonmajor General Governmental Enterprise Total Transfers out: General $ - 10,602,620 3,183,862 13,786,482 Water 3,138, ,138,280 Wastewater 790, ,696 Solid waste 339, ,137 Nonmajor governmental 415,767 2,218,331-2,634,098 Nonmajor enterprise , ,000 Total transfers $ 4,683,880 12,820,951 3,333,862 20,838,693 60

111 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) D. Interfund Receivables, Payables and Transfers (continued) Interfund transfers (continued) Transfers are used to (1) move revenues from the fund responsible for collecting them to the fund responsible for expending them as required by statute or budget, (2) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, and (3) move unrestricted revenues collected in the general fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. In the year ended September 30, 2014, the City made payments from various funds to the general fund in lieu of taxes. The City reported these payments as transfers. Transfers were made from the following funds in the following amounts. E. Leases Water $ 3,138,280 Wastewater 790,696 Solid waste 339,137 Operating leases The government leases building and office facilities and other equipment under noncancelable operating leases. Total costs for such leases were $641,835 for the year ended September 30, The future minimum lease payments for these leases are as follows: Year Ending September 30, 2015 $ 428, , ,677 Total $ 565,321 Capital Leases The government has acquired certain capital assets for governmental activities through the use of lease purchase agreements. These lease agreements qualify as capital leases for accounting purposes and, therefore, have been recorded at the present value of their future minimum lease payments as of the inception date. 61

112 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) E. Leases (continued) Capital Leases (continued) The assets acquired through capital leases are as follows: Accumulated Net Book Cost Depreciation Value Governmental activities: Computer equipment $ 145, ,126 24,225 Total $ 145, ,126 24,225 The future minimum lease obligations and the net present value of these minimum lease payments as of September 30, 2014, are as follows: Year Ending September 30, Governmental Activities 2015 $ 12,485 Total minimum lease payments 12,485 Less: amount representing interest 42 Present value of minimum lease payments $ 12,443 F. Long-term Debt General obligation bonds The City issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. General obligation bonds have been issued for both governmental and business-type activities. These bonds are reported in the proprietary funds if they are expected to be repaid from proprietary fund revenue. General obligation bonds are direct obligations and pledge the full faith and credit of the government. These bonds generally are issued as twenty-year serial bonds with equal amounts of principal maturing each year. General obligation bonds currently outstanding are as follows: 62

113 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) F. Long-term Debt (continued) General obligation bonds (continued) Purpose Interest Rates Amount Governmental activities 2.00% % $ 74,440,000 Governmental activities - refunding 2.00% % 12,680,000 Business-type activities 2.00% % 112,090,000 Business-type activities - refunding 2.00% % 102,560,000 $ 301,770,000 Annual debt service requirements to maturity for general obligation bonds are as follows: Year Ending Governmental Activities Business-type Activities September 30, Principal Interest Principal Interest 2015 $ 5,585,000 3,623,222 11,775,000 8,640, ,760,000 3,388,585 11,980,000 8,101, ,000,000 3,164,466 12,540,000 7,627, ,235,000 2,926,143 12,350,000 7,144, ,995,000 2,684,226 12,935,000 6,653, ,905,000 9,381,193 62,005,000 25,222, ,480,000 2,425,253 43,505,000 14,228, ,160, ,691 36,640,000 5,863, ,920, ,484 Total $ 87,120,000 27,769, ,650,000 84,091,361 Prior year defeasance of bonds In prior years, the City defeased certain bonds by placing the proceeds of new bonds in an irrevocable trust to provide future debt service payments on the old bonds. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the City s financial statements. On September 30, 2014, $180,000 of bonds considered defeased are still outstanding. 63

114 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) F. Long-term Debt (continued) Note payable The City has entered into an agreement with the City of West, Texas to supply water for 40 years pursuant to an agreed-upon rate structure. As part of the agreement, the City purchased a pump station and water transmission line for $12,814 monthly for 18 years and $6,632 monthly for 22 years. Interest is imputed at 4.35% over the term of the agreement. Year Ending Note Payable September 30, Principal Interest 2015 $ 72,555 81, ,777 77, ,142 74, ,657 71, ,328 67, , , , , , , , , ,063 54, ,386 1,564 Total $ 1,898,437 1,223,414 Other long-term debt information Proceeds from general obligation bonds are subject to arbitrage rebate regulations. Estimated rebatable arbitrage has been recorded as a reduction to interest on investments. During 1985, the City entered into a development agreement which provided that the City repay $830,000 for public improvements at an interest rate not to exceed 8%. Repayment of principal and accrual of interest will not begin until revenue is received from the area designated in the development agreement. Annual requirements will be based on the revenue generated from future developments, which cannot be reasonably estimated at September 30,

115 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) F. Long-term Debt (continued) Other long-term debt information (continued) There is no specific maximum debt limit established by law for the City; therefore, the limit is governed by the City s ability to levy and collect taxes. The City s maximum legal rate is $1.85 per $100 valuation; the current tax rate is $ per $100 valuation. The various bond obligations contain certain financial limitations and restrictions. The ordinances authorizing the issuance of general obligation bonds created an interest and sinking fund (general debt service fund). The ordinances require the City to ascertain a rate and amount of tax which will be sufficient to pay interest as it comes due and provide a reserve fund which is adequate to meet principal as it matures. The City is in compliance with all such significant financial restrictions. Refundable contracts The City maintains a policy of refunding to subdivision developers certain costs for the construction of water and wastewater improvements and streets and drainage facilities, applicable to single family housing developments. The policy was created to encourage the construction of single family residences within the corporate limits of the City. Amounts under contract which have not yet been refunded of $2,032,250 have been recorded as a liability in the accompanying statement of net position. Changes in long-term liabilities Long-term liability activity (shown in thousands of dollars) for the year ended September 30, 2014 was as follows: Beginning Ending Due Within Balance Additions Reductions Balance One Year Governmental activities Bonds payable: General obligation bonds $ 90,815 1,645 5,340 87,120 5,585 Plus: premium on bonds 1, ,420 - Total bonds payable 92,438 1,704 5,602 88,540 5,585 65

116 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) F. Long-term Debt (continued) Changes in long-term liabilities (continued) Beginning Ending Due Within Balance Additions Reductions Balance One Year Governmental activities (continued) Capital leases Contracts payable Refundable contracts Estimated claims and judgments 3,270 13,673 13,730 3,213 3,213 Compensated absences 17,598 10,799 10,154 18,243 10,919 Net pension obligation 9, ,067 - Net OPEB obligation Total long-term liabilities 32,069 25,259 24,630 32,698 14,144 Governmental activity long-term liabilities $ 124,507 26,963 30, ,238 19,729 Business-type activities: Bonds payable: General obligation bonds $ 218,290 8,005 11, ,650 11,775 Plus: premium on bonds 9, ,711 8,367 - Total bonds payable 228,081 8,292 13, ,017 11,775 Refundable contracts 1, , Estimated landfill closure 4, ,517 - Note payable 1, , Compensated absences 2,934 2,000 1,935 2,999 1,931 Net pension obligation 1, ,697 - Total long-term liabilities 12,672 3,090 2,699 13,063 2,488 Business-type activity long-term liabilities $ 240,753 11,382 16, ,080 14,263 Internal service funds predominantly serve the governmental funds. Accordingly, long-term liabilities for them are included as part of the above totals for governmental activities. At year-end, $296,732, $374,267, and $3,212,803 of internal service funds compensated absences, net pension obligations and estimated 66

117 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) F. Long-term Debt (continued) Changes in long-term liabilities (continued) claims and judgments, respectively, are included in the above governmental amounts. Also, for the governmental activities, compensated absences, net pension obligation, other post-employment benefits, and capital leases are generally liquidated by the general fund. Refundable contracts are liquidated by the street and drainage refundable contracts debt service fund. G. Restricted Assets The balances of the restricted asset accounts in the enterprise funds are as follows: Customer deposits $ 2,558,681 Bond construction account 28,261,070 Capital grants and contributions 105,001 Total restricted assets $ 30,924,752 H. Risk Management The City is exposed to various risks of losses related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the government carries commercial insurance. The City has established the insurance fund and health insurance fund (internal services funds) to account for and finance its risk management activities. All funds participate in these programs and make payments to these funds based on actuarial estimates of the amounts needed to pay prior and current-year claims and to establish reserves for catastrophe losses. The reserves for catastrophic losses were approximately $6,200,000 at September 30, Liabilities of the funds are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported (IBNRs). The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, federal and state mandated programs, changes in legal doctrines, damage awards (including frequency and amount of payouts), and economic and social trends. Accordingly, claims are reevaluated periodically to consider the effects of such factors. 67

118 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) H. Risk Management (continued) The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses regardless of whether allocated to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. The insurance fund provides coverage for up to a maximum of $450,000 for each non-civil service workers compensation claim and $600,000 for each civil service workers compensation claim. The City purchases commercial insurance for workers compensation claims in excess of coverage provided by the fund. For general liability claims prior to fiscal year 2002, the insurance fund provided coverage for up to $250,000 for each individual and $500,000 aggregate for general liability claims and up to $100,000 for each property damage claim. Beginning with fiscal year 2002, the insurance fund provides commercial insurance for each general liability or property damage claim. The City purchases commercial insurance for claims in excess of $50,000. The commercial liability insurance limits are $1,000,000 per occurrence for general liability with a $2,000,000 annual aggregate, except for law enforcement liability for which the limits are $5,000,000 per occurrence and $10,000,000 annual aggregate. The commercial insurance limits for the City s property coverages are: $10,000,000 aggregate for automobile catastrophe, $407,840,533 aggregate for real and personal property, $12,393,506 aggregate for mobile equipment and $5,000,000 per accident for boiler and machinery. Effective January 1, 2006, the City began to self-insure for health insurance claims. Starting in fiscal year 2014, the City has unlimited stop-loss protection for individual claims exceeding $200,000, as well as unlimited aggregate protection for claims exceeding 125% of expected annual claims. There have been no claim settlements in excess of the insurance coverages that have been procured in 2014, 2013, or Changes in the amounts of estimated unpaid liability claims during the past two years are as follows (shown in thousands of dollars): Unpaid claims, beginning of fiscal year $ 3,270 3,063 Incurred claims (including IBNRs) 13,673 12,902 Claim payments (13,730) (12,695) Unpaid claims, end of fiscal year $ 3,213 3,270

119 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) I. Contingent Liabilities Amounts received or receivable from grant agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenditures that may be disallowed by the grantor cannot be determined at this time, although the government expects such amounts, if any, to be immaterial. There are currently several claims and lawsuits pending against the City. It is the opinion of the City Attorney and management that there is not pending litigation against the City that, if decided against the City, would have a material adverse effect upon the operations of the City or that would exceed the contingency amounts set aside for such purpose. J. Commitments Water storage rights in Lake Waco were acquired by contract with Brazos River Authority in Total consideration for the water storage rights over the fiftyyear term is $9,416,500 with payments of $188,330 due annually through December 15, Such payments are reported as operating deductions of the water fund in the year the payments are made. Additionally, the City Council has approved $2,550,237 to be refunded to subdivision developers for certain costs for the construction of water improvements once applicable contract requirements are met. In August 2012, the City Council approved an amendment to the project/financing plan for reinvestment zone number one to provide partial funding via a grant of up to $35,060,340 to assist with infrastructure improvements for the new McLane Stadium at Baylor University. A total of $11,012,068 had been funded through This annual grant funding is limited to tax increment revenue collected each year from the reinvestment zone number one as follows: Year Amount 2015 $ 3,006, ,006, ,006, ,006, ,006, ,006, ,006, ,006,034 69

120 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) K. Other Post-employment Benefits Plan Description - The City administers a single-employer defined benefit life insurance plan. The plan provides $2,500 of life insurance to each qualified retiree. An optional $5,000 in life insurance is available at the retiree s expense. According to the City s personnel policy, retirees who have retired under the Texas Municipal Retirement System with a minimum of twenty years of service are eligible for postretirement life insurance benefits. Actuarial methods and assumptions The Projected Unit Credit actuarial cost method is used to calculate the GASB annual required contribution (ARC) for the City s retiree life insurance plan. Using the plan benefits, the present life insurance premiums and a set of actuarial assumptions, the anticipated future payments are projected. The projected unit credit method then provides for a systematic recognition of the cost of these anticipated payments. The yearly ARC is computed to cover the cost of benefits being earned by covered members as well as to amortize a portion of the unfunded accrued liability. Projections of life insurance benefits are based on the plan as understood by the City and include the types of benefits in force at the valuation date and the pattern of sharing benefit costs between the City and the City s employees to that point. Actuarial calculations reflect a long-term perspective and employ methods and assumptions that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. Significant methods and assumptions were as follows: Actuarial Methods and Assumptions Type of benefit Inflation rate Investment rate of return Actuarial cost method Amortization method Amortization period Payroll growth Life insurance only 3.0% per annum 4.50%, net of expenses Projected Unit Credit Cost Method Level as a percentage of employee payroll 30-year open amortization 3.0% per annum Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events in the future. Amounts determined regarding the funded status and the annual required contributions of the City s 70

121 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) K. Other Post-employment Benefits (continued) Actuarial methods and assumptions (continued) retiree life insurance plan are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. The required schedule of funding progress presented as required supplementary information provides multi-year trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. The City s annual other post-employment benefits (OPEB) cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameter of GASB Statement No. 45. The ARC represents a level of accrual that is projected to recognize the normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The City s annual OPEB cost for the current year is as follows: Reconciliation of Net Other Post-employment Benefit Obligation Annual Required Contribution (ARC) $ 83,086 90,198 87,571 Interest on OPEB obligation 10,454 9,156 7,834 Adjustment to the ARC (amortization) (9,686) (8,483) (7,258) Annual OPEB cost 83,854 90,871 88,147 Contributions made (63,600) (62,028) (58,769) Increase in net OPEB obligation 20,254 28,843 29,378 Net OPEB obligation, beginning of year 232, , ,095 Net OPEB obligation, end of year $ 252, , ,473 The City s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal year ending September 30, 2014 and the preceding two fiscal years were as follows: 71

122 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) K. Other Post-employment Benefits (continued) Actuarial methods and assumptions (continued) Employer Fiscal Year Annual Amount Percentage Net OPEB Ending OPEB Cost Contributed Contributed Obligation September 30, 2014 $ 83,854 63, % $ 252,570 September 30, ,871 62, % 232,316 September 30, ,147 58, % 203,473 Funding status and funding progress The following schedule of funding progress presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time. The actuarial valuation is performed on a bi-annual basis. Actuarial UAAL as a Actuarial Actuarial Accrued Unfunded Percentage of Valuation Value of Liability AAL Funded Covered Covered Date Assets (AAL) (UAAL) Ratio Payroll Payroll 12/31/2013 $ - 1,576,980 1,576,980 0% $ 71,807, % 12/31/2011-1,646,618 1,646,618 0% 67,309, % 12/31/2009-1,119,718 1,119,718 0% 66,925, % 12/31/ , ,424 0% 64,258, % Under the reporting parameters, the City s retiree life insurance plan is 0% funded with an estimated actuarial accrual liability exceeding actuarial assets by $1,576,890 at December 31, As of the most recent valuation, the ratio of the unfunded actuarial accrued liability to annual covered payroll is 2.2% L. Pension Plans Primary Government Deferred compensation plan The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all City employees, permits them to defer a portion of their salary until future years. Participation in the plan is optional. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. 72

123 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) L. Pension Plans Primary Government (continued) Defined benefit plan Texas Municipal Retirement System Plan Description The City provides pension benefits for all of its eligible employees through a non-traditional, joint contributory, hybrid defined benefit plan in the state-wide Texas Municipal Retirement System (TMRS), an agent multiple employer public employee retirement system. The plan provisions that have been adopted by the City are within the options available in the governing state statutes of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained from the TMRS website at The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City were as follows: Employee deposit rate 7% Matching ratio (City to employee) 2 to 1 Years required for vesting 5 years Updated service credit 100% repeating, transfers Annuity increase (to retirees) 50% of CPI (ad hoc) Members can retire at certain ages, based on the years of service with the City. The service retirement eligibilities for the City (expressed as years of service/age) are: 5 years/age years/any age Contributions - Under the state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using Entry Age Normal (EAN) cost method. (EAN was first used in the December 31, 2013 valuation; previously, the Projected Unit Credit actuarial cost method had been used.) This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to year. The normal cost 73

124 IV. Detailed Notes on All Funds (continued) City of Waco, Texas Notes to Financial Statements (Continued) L. Pension Plans Primary Government (continued) Defined benefit plan Texas Municipal Retirement System (continued) contribution rate for an employee is the contribution rate which if applied to a member s compensation throughout their period of anticipated covered service with the municipality would be sufficient to meet all benefits payable on their behalf. The salary-weighted average of the individual rates is the total normal cost rate. The prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as updated service credits and annuity increases. The City contributes to the TMRS Plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect (i.e., the December 31, 2013 valuation will determine the contribution rate beginning January 1, 2015). Reconciliation of Net Pension Obligation Annual Required Contribution (ARC) $ 10,071,993 9,887,587 11,186,956 Interest on net pension obligation 817, , ,435 Adjustment to the ARC (735,290) (712,369) (643,355) Annual pension cost 10,154,412 9,986,036 11,292,036 Contributions made (10,071,993) (9,887,587) (10,400,853) Increase in net pension obligation 82,419 98, ,183 Net pension obligation, beginning of year 11,681,564 11,583,115 10,691,932 Net pension obligation, end of year $ 11,763,983 11,681,564 11,583,115 Three-Year Trend Information Fiscal Year Annual Pension Percentage of Net Pension Annual Required Ending Cost (APC) APC Contributed Obligation Contribution Rate 2014 $ 10,154,412 99% $ 11,763, % ,986,037 99% 11,681, % ,292,035 92% 11,583, % 74

125 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) L. Pension Plans Primary Government (continued) Defined benefit plan Texas Municipal Retirement System (continued) The required contribution rate for fiscal year 2014 was determined as part of the December 31, 2011 and 2012 actuarial valuations. Additional information as of the latest actuarial valuation, December 31, 2013 also follows: Valuation Date 12/31/ /31/ /31/2013 Actuarial Cost Method Projected Unit Projected Unit Entry Age Credit Credit Normal Amortization Method Level Percent Level Percent Level Percent of Payroll of Payroll of Payroll GASB 25 Equivalent Single 24.3 years; 24.1 years; 18.5 years; Amortization Period closed period closed period closed period Amortization Period for new 30 years 30 years 30 years Gains/Losses Asset Valuation Method 10-year smoothed 10-year smoothed 10-year smoothed market market market Actuarial Assumptions: Investment Rate of Return* 7.0% 7.0% 7.0% Projected Salary Increases* Varies by Varies by Varies by age and service age and service age and service *Includes inflation at 3.0% 3.0% 3.0% Cost-of-living adjustments 1.5% 0.0% 0.0% Funded Status and Funding Progress In October 2013, the TMRS Board approved actuarial changes in (a) the funding method from Projected Unit Credit to Entry Age Normal, (b) the post-retirement mortality assumptions used in calculating liabilities and contribution rates and in the development of the Annuity Purchase Rate factors, and (c) the amortization policy. These actuarial changes were effective with the December 31, 2013 actuarial valuation. For a complete description of the new actuarial cost method and assumptions, please see the December 31, 2013 TMRS Comprehensive Annual Financial Report (CAFR). 75

126 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) L. Pension Plans Primary Government (continued) Defined benefit plan Texas Municipal Retirement System (continued) The funded status as of December 31, 2013 and the preceding two years is presented as follows: Actuarial UAAL as a Actuarial Actuarial Accrued Unfunded Percentage Valuation Value of Liability Funded AAL Covered of Covered Date Assets (AAL) Ratio (UAAL) Payroll Payroll $ 307,003, ,732, % $ 47,728,649 67,309, % ,364, ,784, % 42,419,742 68,731, % ,003, ,572, % 61,568,826 71,807, % Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-term perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. M. Fire and Police One-half Pay Pension The City funded on a pay-as-you-go basis and administered a one-half singleemployer defined benefit pension plan for employees who were not eligible to participate when TMRS was adopted. Any policeman, fireman or fire alarm operator employed by the City prior to September 12, 1950, and their named dependents are entitled to benefits under this plan. Employees were able to retire after 25 years of service. The City Council passed an ordinance for pension pay equal to one-half of the salary for each employee at the time of retirement. There are five retired firemen and policemen under this plan with no eligible active employees. An actuarial valuation has not been performed on this plan due to its small relative size. The estimated unfunded liability based on the present value of future benefits with a 7.5 percent interest rate assumption is $138,370 at September 30,

127 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) M. Fire and Police One-half Pay Pension (continued) These benefits are budgeted and recorded in the general fund as expenditures in the year paid. Total costs of these paid benefits for the three years ended September 30, are as follows: 2014 $ 41, , ,564 N. Solid Waste Landfill Closure and Post-closure Care Cost State and federal laws and regulations require that the City place a final cover on its landfill when closed and perform certain maintenance and monitoring functions at the landfill site for thirty years after closure. In addition to operating expenses related to current activities of the landfill, an expense provision and related liability are being recognized based on the future closure and post-closure care costs that will be incurred near or after the date the landfill no longer accepts waste. The recognition of these landfill closure and post-closure care costs is based on the amount of usage of the landfill to date. The estimated liability for landfill closure and post-closure care costs included in accrued liabilities is $4,516,860 as of September 30, 2014, which is based on 69.5% usage (filled) of the landfill. It is estimated that an additional $1,981,282 will be recognized as closure and postclosure care expenses between the date of the balance sheet and the date the landfill is expected to be filled to capacity (2023). The estimated total current cost of the landfill closure and post-closure care ($6,498,142) is based on the amount that would be paid if all equipment, facilities, and services required to close, monitor and maintain the landfill were acquired as of September 30, However, the actual cost of closure and post-closure care may change due to inflation, changes in technology, or changes in landfill laws and regulations. O. Conduit Debt Obligations From time to time, Central Waco Development Corporation and Waco Health Facilities Development Corporation have issued industrial revenue bonds to provide financial assistance to private-sector entities for the acquisition and construction of industrial, commercial and health facilities deemed to be in the public interest. The bonds are secured by the property financed and are payable solely from payments received on the underlying mortgage debt. Upon repayment of the bonds, ownership of the facilities transfers to the private-sector entity served by the bond issue. Neither Central Waco Development Corporation, Waco Health Facilities Development Corporation, the City, nor any political subdivision thereof is obligated 77

128 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) O. Conduit Debt Obligations (continued) in any manner for repayment of the bonds. Accordingly, the bonds are not reported as liabilities in the financial statements of Central Waco Development Corporation, Waco Health Facilities Development Corporation, or the City. As of September 30, 2014, there are three series of industrial revenue bonds outstanding. The aggregate principal amount payable for the one series issued after July 1, 1995 was $4,100,000. The aggregate principal amount payable for the two series issued prior to July 1, 1995 could not be readily determined; however, their original issue amounts totaled $4,850,000. P. Waco Public Improvement District #2 Waco Public Improvement District #2 transactions are recorded in an agency fund as the City acts as an agent for the property owner in collecting assessments and forwarding the collections to the bondholders. However, the City is not obligated in any manner for repayment of these special assessments. As of September 30, 2014, such special assessment debt outstanding totaled $1,242,000. Q. Undivided Interest in Waco Metropolitan Area Regional Sewer System During 2004, the City entered into an agreement with four other participating cities to acquire the facilities and operations of the Waco Metropolitan Area Regional Sewer System (the System) from Brazos River Authority (the Authority). Prior to the acquisition, the cities were "tenants in common" of the System owned by the Authority, and funded the System through payments to the Authority based on the amount of wastewater treated. The City's initial purchase included an 84.47% undivided interest in the System; however, the City subsequently sold portions of its undivided interest to other cities leaving it with a % undivided interest in the System. The City s undivided interest in the System as of September 30, 2014 was % as a result of certain capacity expansion improvements completed during The City assisted four of the participating cities in financing their initial investments. During 2004, the City's wastewater fund advanced $1,849,058 to the four participating cities at an interest rate of 3.65% to be repaid in annual installments through February As of September 30, 2014, $551,475 of principal remained outstanding on these loans. 78

129 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) Q. Undivided Interest in Waco Metropolitan Area Regional Sewer System (continued) Under the interlocal agreement for the System, a board was created consisting of the city managers from each of the seven participating cities. The operation and administration of the System is subject to joint control by the cities through the board; however, a separate legal entity was not created. The agreement allows the cities to pool resources and share the costs, risks, and rewards of providing services. Further, each city retains an ongoing financial interest and ongoing financial responsibility in the operations of the System. The City has reported its share of assets, liabilities, equity, revenues and expenses that are associated with this joint activity in its wastewater fund as follows: Current assets $ 8,332,776 Capital assets 32,532,236 Current liabilities (1,341,882) Noncurrent liabilities (154,553) Net position $ 39,368,577 Operating revenue $ 542,235 Operating expenses (4,908,168) Non-operating revenue 12,019 Change in net position $ (4,353,914) R. Related Organization Waco Education Finance Corporation is a related organization to which the City appoints board members but for which the City has no significant financial accountability. S. Change in Accounting Principles Effective October 1, 2013, the City adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. With the adoption of GASB Statement No. 65, the City reclassified certain unavailable revenues, such as property taxes, court fines, special assessments, etc., to deferred inflows of resources in the governmental funds. 79

130 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) S. Change in Accounting Principles (continued) Additionally, the City reclassified the deferred loss on refunding bonds from bonds payable to deferred outflows of resources in the statements of net position. Finally, the City reported a cumulative effect of a change in accounting to expense bond issuance costs as incurred, which reduced the net position of the City at October 1, 2013 by $806,206 for governmental activities, $1,926,547 for business-type activities, $1,300,031 for the water fund, $544,331 for the wastewater fund, and $82,185 for the solid waste fund. T. Prior Period Adjustments During the current year, the City determined that amounts previously reported as unavailable revenue and unearned revenue should be recognized as revenue. Accordingly, restricted fund balance/net position at October 1, 2013 was increased by $1,028,277 for the general fund, $2,562,113 for nonmajor governmental funds, $1,174,035 for nonmajor enterprise funds, $839,535 for governmental activities, and $1,174,035 for business-type activities. U. Authoritative Pronouncements Not Yet Effective A summary of pronouncements issued by the Governmental Accounting Standards Board (GASB) which may impact the City but are not yet effective follows. The City has not yet determined the effects of the adoption of these pronouncements on the financial statements. GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 (issued June 2012) the objective of this statement is to improve the decision-usefulness of information in employer and governmental nonemployer contributing entity financial reports by requiring recognition of the entire net pension liability and a more comprehensive measure of pension expense. The requirements of this Statement are effective for financial statements for periods beginning after June 15, GASB Statement No. 69, Government Combinations and Disposals of Government Operations (issued January 2013) the objective of this statement is to provide specific accounting and financial reporting guidance for combinations in the governmental environment. Additionally, this statement also improves the decision usefulness of financial reporting by requiring that disclosures be made by 80

131 City of Waco, Texas Notes to Financial Statements (Continued) IV. Detailed Notes on All Funds (continued) U. Authoritative Pronouncements Not Yet Effective (continued) Governments about combination arrangements in which they engage and for disposals of government operations. The requirements of this Statement are effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013, and should be applied on a prospective basis. GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees (issued April 2013) the objective of this statement is to improve accounting and financial reporting by state and local governments that extend and receive nonexchange financial guarantees. The requirements of this Statement are effective for reporting periods beginning after June 15, GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68 (issued November 2013) the objective of this statement is to address the issue related to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government s beginning net pension liability. The requirements of this Statement are effective for reporting periods beginning after June 15,

132 APPENDIX C FORMS OF BOND COUNSEL'S OPINION

133 [Form of Opinion of Bond Counsel] [Closing Date] $73,310,000 CITY OF WACO, TEXAS GENERAL OBLIGATION REFUNDING BONDS SERIES 2015 WE HAVE represented the City of Waco, Texas (the Issuer ) as its bond counsel in connection with an issue of bonds (the Bonds ) described as follows: CITY OF WACO, TEXAS, GENERAL OBLIGATION REFUNDING BONDS, SERIES 2015, dated February 1, The Bonds mature, bear interest, are subject to redemption and may be transferred and exchanged as set out in the Bonds and in the bond ordinance adopted by the City Council of the Issuer authorizing their issuance (the Bond Ordinance ) and a pricing certificate executed pursuant to the authority delegated in the Bond Ordinance (the Pricing Certificate, and, together with the Bond Ordinance, the Ordinance ). WE HAVE represented the Issuer as bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Bonds from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Bonds. Capitalized terms used herein, unless otherwise defined, have the meanings set forth in the Ordinance. IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Bonds, which contains certified copies of certain proceedings of the Issuer; a certain escrow agreement (the Escrow Agreement ) between the Issuer and The Bank of New York Mellon Trust Company, N. A., as escrow agent (the Escrow Agent ); a report (the Report ) of Grant Thornton LLP, Certified Public Accountants (the Verification Agent ) verifying the sufficiency of the deposit made with the Escrow Agent for the defeasance of the Refunded Obligations and the mathematical accuracy of certain computations of the yield on the Bonds and obligations acquired with the proceeds of #

134 Page 2 the Bonds; customary certificates of officers, agents and representatives of the Issuer and other public officials; and other certified showings relating to the authorization and issuance of the Bonds. We have also examined such applicable provisions of the Internal Revenue Code of 1986, as amended (the Code ), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the Service ) as we have deemed relevant. We have also examined executed Bond No. T-1 of this issue. BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Bonds constitute valid and legally binding obligations of the Issuer; (B) A continuing ad valorem tax, within the limits prescribed by law, has been levied on all taxable property in the City of Waco and pledged irrevocably to the payment of the principal of and interest on the Bonds; and (C) Firm banking and financial arrangements have been made for the discharge and final payment of the Refunded Bonds pursuant to the Escrow Agreement and, therefore, the Refunded Bonds are deemed to be fully paid and no longer outstanding except for the purpose of being paid from the funds provided therefor in the Escrow Agreement. THE RIGHTS OF THE OWNERS of the Bonds are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION THAT under existing law: (1) Interest on the Bonds is excludable from gross income for federal income tax purposes; and (2) The Bonds are not private activity bonds within the meaning of the Code, and, as such, interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Bonds will be included in the adjusted current earnings of a corporation (other than an S corporation, regulated investment company, REIT or REMIC) for purposes of computing its alternative minimum tax liability. In providing such opinions, we have relied on representations of the Issuer, the Issuer s financial advisor and the underwriters of the Bonds with respect to matters solely within the knowledge of the Issuer, the Issuer s financial advisor and the underwriters, respectively, which #

135 Page 3 we have not independently verified. In addition, we have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Bonds for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the Issuer fails to comply with the foregoing covenants of the Ordinance, interest on the Bonds could become includable in gross income from the date of original delivery of the Bonds, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Bonds. Owners of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the branch profits tax on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Bonds). Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. #

136 [Form of Opinion of Bond Counsel] [Closing Date] $13,235,000 CITY OF WACO, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2015 WE HAVE represented the City of Waco, Texas (the Issuer ), as its bond counsel in connection with an issue of certificates of obligation (the Certificates ) described as follows: CITY OF WACO, TEXAS, COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2015, dated February 1, The Certificates mature, bear interest, are subject to redemption and may be transferred and exchanged as set out in the Certificates and in the Ordinance adopted by the City Council of the Issuer authorizing their issuance (the Certificate Ordinance ), and the Pricing Certificate executed by an authorized officer of the City (the Pricing Certificate, and, together with the Certificate Ordinance, the Ordinance ). WE HAVE represented the Issuer as its bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the Issuer s Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we #

137 Page 2 have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the Issuer, customary certificates of officers, agents and representatives of the Issuer and other public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined such applicable provisions of the Internal Revenue Code of 1986, as amended (the Code ), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the Service ) as we have deemed relevant. We have also examined executed Certificate No. 1 of this issue. BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) (B) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and that therefore the Certificates constitute valid and legally binding obligations of the Issuer; and A continuing ad valorem tax upon all taxable property within the City of Waco, Texas, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limits prescribed by law. In addition, the Certificates are further secured by a limited pledge of the surplus revenues of the Issuer s water and sewer system as provided in the Ordinance. THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION that under existing law: (1) Interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes; and (2) The Certificates are not private activity bonds within the meaning of the Code, and, as such, interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the adjusted current earnings of a corporation (other than any S corporation, regulated investment company, REIT or REMIC) for purposes of computing its alternative minimum tax liability. #

138 Page 3 In providing such opinions, we have relied on representations of the Issuer, the Issuer s Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the Issuer, the Issuer s Financial Advisor and the Underwriters, respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Certificate Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the Issuer fails to comply with the foregoing provisions of the Certificate Ordinance, interest on the Certificates could become includable in gross income from the date of original delivery of the Certificates, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Certificates. Owners of the Certificates should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the U.S. may be subject to the branch profits tax on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Certificates). The opinions set forth above are based on existing law which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, #

139 Page 4 respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. #

140 [Form of Opinion of Bond Counsel] [Closing Date] $ CITY OF WACO, TEXAS COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION SERIES 2015 WE HAVE represented the City of Waco, Texas (the Issuer ), as its bond counsel in connection with an issue of certificates of obligation (the Certificates ) described as follows: CITY OF WACO, TEXAS, COMBINATION TAX AND REVENUE CERTIFICATES OF OBLIGATION, SERIES 2015, dated February 1, The Certificates mature, bear interest, are subject to redemption and may be transferred and exchanged as set out in the Certificates and in the Ordinance adopted by the City Council of the Issuer authorizing their issuance (the Certificate Ordinance ), and the Pricing Certificate executed by an authorized officer of the City (the Pricing Certificate, and, together with the Certificate Ordinance, the Ordinance ). WE HAVE represented the Issuer as its bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the Issuer s Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. IN OUR CAPACITY as bond counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we #

141 Page 2 have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the Issuer, customary certificates of officers, agents and representatives of the Issuer and other public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined such applicable provisions of the Internal Revenue Code of 1986, as amended (the Code ), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the Service ) as we have deemed relevant. We have also examined executed Certificate No. 1 of this issue. BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) (B) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and that therefore the Certificates constitute valid and legally binding obligations of the Issuer; and A continuing ad valorem tax upon all taxable property within the City of Waco, Texas, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limits prescribed by law. In addition, the Certificates are further secured by a limited pledge of the surplus revenues of the Issuer s water and sewer system as provided in the Ordinance. THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION that under existing law: (1) Interest on the Certificates is excludable from gross income of the owners thereof for federal income tax purposes; and (2) The Certificates are not private activity bonds within the meaning of the Code, and, as such, interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the adjusted current earnings of a corporation (other than any S corporation, regulated investment company, REIT or REMIC) for purposes of computing its alternative minimum tax liability. #

142 Page 3 In providing such opinions, we have relied on representations of the Issuer, the Issuer s Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the Issuer, the Issuer s Financial Advisor and the Underwriters, respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Certificate Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the Issuer fails to comply with the foregoing provisions of the Certificate Ordinance, interest on the Certificates could become includable in gross income from the date of original delivery of the Certificates, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Certificates. Owners of the Certificates should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations, low and middle income taxpayers otherwise qualifying for the health insurance premium assistance credit and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the U.S. may be subject to the branch profits tax on their effectively-connected earnings and profits (including tax-exempt interest such as interest on the Certificates). The opinions set forth above are based on existing law which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given as to whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer. We observe that the Issuer has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, #

143 Page 4 respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. #